John Collett May 23, 2012
Illustration: Greg Newington
The 'Greek tragedy' now also playing in Spain has put our dollar centre stage. But how long will its run last?
Those intending to travel abroad may have missed the most favourable exchange rates on the Australian dollar, at least for the time being. In February this year the Australian dollar was buying US108¢, more than €80¢ and almost 68 British pence. At the time of writing it is buying US100¢, a fall of about 8 per cent, and about 8 per cent fewer British pence and slightly fewer euro cents.
Experts say the Australian dollar could fall further in the coming weeks, perhaps as low as US95¢, as worries over a possible Greek exit from the euro and concerns over Spanish banks continue to shake world markets. Concerns over the Chinese economy are growing.
''I suspect it could go lower,'' the chief economist at AMP Capital Investors, Shane Oliver, says. ''It looks and feels like the pull-back last year when the Aussie dollar went from a high of about $US1.10 in the middle of last year to fall to US94¢.
''We could be going through another period like that, which suggests to me that we could fall back to the mid-US90¢ over the next few months.''
The head of investment markets research at Perpetual, Matthew Sherwood, says political uncertainty in Europe is going to continue for weeks at the very least. Markets will remain on edge and drift lower, and our currency will probably fall further.
''If Europe is somehow able to stabilise, the Australian dollar will probably fall another couple of US cents,'' he says.
But if Greece exits the euro, the Australian dollar could ''go through 90¢, but it's anyone's guess,'' he says.
However, the fundamentals of the Australian economy remain strong and in ''normal'' circumstances, the Australian dollar should trade between US95¢ and US105¢, Sherwood says. ''With the industrialising and urbanising of much of Asia and rising demand for commodities, I tend to think that's the natural range for the Australian dollar,'' he says.
Oliver says that by the end of the year, the Australian dollar should be back to more than US100¢, or parity, with the US dollar. The American economy is improving and interest rates in Europe should fall further.
The Australian dollar's fortunes are tied to the outlook for global growth because of Australia's reliance on commodities exports.
In periods of uncertainty, international investors seek out US dollar-denominated assets as a safe haven.
Currency is notoriously difficult to forecast (some say it's impossible), as so many variables are at play.
One reason for the stronger Australian dollar is our relatively high interest rates when interest rates around the rest of the world are low. Global capital chases high interest rates, which helps support our dollar.
But when, as now, fears over Europe come to the fore, the risks for global investors continuing to invest in Australian dollar-denominated assets outweighs the relatively high interest rates on offer. Australian interest rates are on their way down, though they are still relatively high.
As the table shows, while the Australian dollar has fallen by about 8 per cent against the US dollar and against the British pound since February this year, the euro has fallen by less than 3 per cent against the Australian dollar.
Those heading abroad in the next few weeks can still lock in very favourable exchange rates but those who wait to buy foreign currency risk getting less for their Aussie dollars, Sherwood says.