Aussie dollar soars, but not for long

Importers across the country have been rejoicing in the last few days as the Australian dollar touched US77c, up more than 20% since it fell to US61c in October 2008.

But while economists believe the dollar could touch US80c in the next few weeks, most commentators believe the spike will be short-lived.

There are two main reasons for the dollar’s strength in recent weeks.

The RBA’s decision to leave rates on hold has helped emphasise the difference between our cash rate (which currently sits at 3%) and the rates of major economies including the United States and Britain (where rates are stuck between zero to 0.25%). Australia suddenly looks like a good place to park cash, which helps increase demand for our dollar.

Second, the recovery in global sharemarkets and commodity prices in the past two months has led global investors to reappraise the Aussie.

“The sharp rise in the appetite for risk and the associated sustained recovery in major asset markets has clearly been the key support mechanism for Australian dollar,” Westpac chief economist Bill Evans says.

But how high could the dollar go?

“The Australian dollar may still reach higher in the coming several weeks – potentially topping out as high as US78.5 cents or even US80 cents,” ANZ economist Amy Auster said in a note to clients.

But both Auster and Evans expect the dollar will start falling in the second half of the year, as the RBA starts cutting rates again to cushion the Australian economy from an expected spike in unemployment.

Evans also argues that Australia’s high level of debt could make investors cautious about investing in Australia. He is tipping rates to be at US70c in September and US68c by the end of the year.

“The Australian dollar is not expected to return to crisis levels, but we believe the current levels of the dollar relies on a much more robust global recovery than we expect, and is unlikely to be sustained,” Evans says.

“Once a reassessment of real prospects is priced in, recovery back to current levels will not occur until well into 2010.”