Dollar's rise set to end

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This was published 13 years ago

Dollar's rise set to end

By Chris Zappone

The Australian dollar's sharp rise over recent months is set to come to an end as investors weigh up the prospect that a future interest rate rise could be some way off.

Since May, the dollar has climbed significantly, rising almost 12 per cent from a low that month of 81.6 US cents - but that buoyancy is about to be tempered.

Yesterday, the Reserve Bank opted to keep the official cash rate on hold at 4.5 per cent. Rates are all-important for the strength of the Australian dollar - high rates make Australia an attractive option for international investors, and that increases demand for the currency.

After talk of US dollar parity as recently as April, analysts are now saying the Australian dollar will not rise beyond 92 US cents in coming months amid expectations that rates would remain static here and in the US, the world's largest economy.

This morning the dollar was trading at 91.36 US cents, near where it opened but slightly down on the 91.48 US cents it was buying in offshore trade overnight.

“The prospect of flatter interest rates in Australia is going to limit the upside potential in the Aussie,” said GFT director of currency research Kathy Lien. “With the RBA slowing down tightening (raising the official cash rate) and likely to remain on hold for the next two meetings, the Australian dollar will have a tough time extending its gains beyond 92 cents.”

In May, when the fears for Europe's sovereign debt unleashed global market turmoil, the Australian dollar plunged from 92.7 to as low as 81.6 US cents.

It was in that month that the RBA last lifted rates, by a quarter of a percentage point to 4.5 per cent. That is much higher than the interest rates in many of the world's developed economies.

In the US, the official rate is between zero and 0.25 per cent and many other central banks have a similar cash rate in place. Currency values are highly influenced the rates that apply in their home countries.

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OzForex senior FX Manager Jim Vrondas forecast the dollar would remain at about 92 US cents before easing back to 90 cents in coming weeks.

“It does appear the RBA will keep rates on hold for the next few months at least,” he said. “In light of that, the prospects for the Aussie do hinge on US economy.”

That is because the US dollar has weakened across major currencies on fears about the pace of the American economy's recovery. A weaker greenback generally means a higher Aussie dollar.

The US dollar is at a 15-year low against the yen, buying 85.87 yen, a three-month low against the euro, trading at 75.6 euro cents, and a six-month low against the British pound, going for 62.7 pence.

The Australian dollar, by comparison, is buying 78.1 yen, the best in more than a month.

It was buying 69 euro cents and 57.2 pence.

Another tailwind for the Australian dollar is improving commodities prices, which are closely linked in the minds of global investors to the local currency.

“While interest rate differentials aren't evolving that favourably for the currency, commodity prices could be,” said Credit Suisse economist Damien Boey.

“We think that Australian dollar is a touch expensive relative to fundamentals, but if strong world growth continues, commodity prices will rise, and fundamentals which catch up to the level of the currency.”

The Reuters/Jefferies commodities index has risen 9 per cent to 276.6 since July 6, as wheat, copper, oil and sugar prices have surged in recent weeks.

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czappone@fairfax.com.au

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