Australian dollar slides below parity

The Australian dollar slid below parity with the US dollar overnight, to $US0.99.

It’s the first time in 11 months that Australians have woken up to a currency below parity with America’s.

This was likely driven by a combination of the Reserve Bank interest rate cut last week, as well as more positive figures coming out of the US economy last night, says AMP chief economist Shane Oliver.

He says tonight’s release of the federal budget is unlikely to have any large effect on the currency, but it broadly contributes to a range of factors that mean the Australian dollar is more likely to fall than rise in coming months.

“The Australian dollar is driven by a range of things, but traditionally, the budget hasn’t had a huge impact,” Oliver says. “Far more important are commodity prices and interest rates, as well as how the global economy is going.

“The level of budget deficit likely to be revealed tonight, by global standards, is quite benign. It won’t have a huge impact on the currency. But investors will look at whether a tightening on government spending is likely to drag on economic growth. Lower economic growth could boost the chances of further interest rate cuts, which could drag the Aussie dollar lower.”

The past decade has seen the Australian dollar almost double in value, from it buying $US0.48 to $US1.10 in 2011, a level it has not significantly shifted from since. This has largely been driven by commodity prices, which are now trending down, Oliver says.

“The Australian dollar will be less robust going forward. The broad trend will be down.”

Oliver said that although he couldn’t see what could cause a dramatic collapse in the dollar, it was impossible to rule it out.

“The thing with currencies is they’re extremely volatile. But it’s clear the risks on the dollar have swung from the upside to the downside.

“Which is what you need right now. The high dollar has been a real head-wind on Australia’s growth. If it comes off a bit, it’ll provide a bit more confidence to other sectors of the economy as the mining boom slows down.”

At 10am this morning, the Australian dollar rose slightly to parity with the greenback.