The Australian dollar could break above parity with the US dollar for the first time in nearly 30 years if the Reserve Bank of Australia (RBA) raises the base interest rate from a current three per cent over the next 12 months.
But economists say the domestic currency is unlikely to stay above $US1 for long.
Five out of six economists surveyed believe the domestic the unit can break parity with the US dollar in either the June or September quarters of 2010.
ICAP economist Adam Carr said financial markets could be tempted to test the local currency above $US1 in early 2010. If successful, it will be the first time Australia has broken parity since the days of fixed exchange rates before the currency was floated in 1983.
“The prospects for the Aussie dollar are very good,” he said.
“When the RBA starts its tightening cycle I think we’ll be around parity, whether we break it or not is not my formal forecast, but we’ll be very close.
“If we break through ($US1) I don’t imagine we’ll hold it for more than nine months.”
On Wednesday September 23, the Australian dollar hit a 13-month high of 87.87 US cents, and was up 27 US cents from its global financial crisis low of 60.12 cents recorded on October 27, 2008.
In the current global economic environment, investors are attracted to the unit because Australia is one of the few western industrialised nations with a significant base interest rate – the three per cent cash interest rate is well above the comparable rates for most of its trading partners.
The US base interest rate has been steady in a target band of zero to 0.25 per cent since December, while Japan’s central bank has held it’s rate steady at 0.1 per cent since last October.
The European Central Bank, which oversees the 16-nation Eurozone, has held its rate at one per cent since October.
Kinetic Securities chief economist Clifford Bennett said Australia’s comparatively high interest rate and prime position in growing Asia region could see the unit break and sustain parity over the next two years.
The most bullish of the economists surveyed, Mr Bennett said the global financial crisis had skewed the terrain of global economics in Australia’s favour.
“When a global investor or holder of a global portfolio looks around the world, what currencies would appreciate in an environment of a falling US dollar? Two currencies stand out: the Euro and the Aussie,” he said.
“The Euro because it’s the only viable reserve currency at the moment, and the Australian dollar because it’s a fabulous way of leveraging into the Chinese and Asia growth story.”
AMP Capital Investors chief economist Shane Oliver said Australia’s favourable terms of trade, the ratio of export prices to import prices, would also allow the currency to test parity next year.
“The last time Australia’s terms of trade was at current levels was in the early 1950s and back then one Australian dollar actually bought $US1.12,” he said.
But signs that the US economy has stabilised have pricked the antennae of currency traders.
On September 15, US Federal Reserve Chairman Ben Bernanke told the Washington based think tank, the Brookings Institution, that the US recession was over.
However, Mr Bernanke said the US economy would remain weak for some time.
It was a sentiment matched a week later when the Fed’s policy making arm, the Federal Open Market Committee (FOMC), opted to leave the US federal funds rate unchanged in its current target band.
The FOMC said in an accompanying statement it “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The median economist forecast has the unit retreating back to 89.5 US cents as the US economy recovers.
Charles Wiggins, a corporate risk manager at Custom House Global Foreign Exchange, said a weak US economy is not a long-term prospect.
He said the FOMC could raise rates in 2010 if the protracted economic recovery shows signs of digging in.
“Generally, you’d think that raising interest rates would have a positive effect on the currency, primarily from that function … where you get the offshore investors coming through and taking advantage of the offshore differentials.
“That may be for the short term, but if the US economy starts to pick up steam and the US has to start hiking their interest rates, in theory you’d get the same sort of movement on the US dollar.”