Australian dollar falls below US parity

The Australian dollar fell to 99.29 US cents yesterday as the United States’ credit downgrade continues to alarm investors, although Australian stocks made a stunning afternoon comeback after they plunged by more than 4% at midday.

After trading as high as 110.65 US cents early last week, the domestic currency fell to 99.29 US cents just after midday. However, it then rebounded to 103.52 US cents.

Despite the fall, triggered by the US credit crisis, Nomura chief economist Stephen Roberts said the near-term prospects for the Australian dollar are positive.

“If Asian growth comes through this current difficulty in world markets better than most other regions, which we suspect, then at some point you would expect to see the selling abate and the Australian dollar start to recover again,” Roberts said in a statement.

Roberts said traders are now awaiting a cash rate decision from the US Federal Reserve, which will happen overnight.

Meanwhile, Austock Securities senior client adviser Michael Heffernan said about $44 billion in value was wiped off the Australian sharemarket today.

By noon, Australian stocks had plunged more than 4%, following falls of more than 5% on Wall Street overnight, amid fears the world could be on the brink of another recession.

Just after midday, the S&P/ASX200 index was down 4.65%, while the All Ordinaries index had fallen 4.75%.

Heffernan said the fall in Australian stocks was bigger than expected, claiming there is “blood all over the place”.

“People are making decisions on sentiment and emotion, and there’s a bit of margin selling too. You’re going to see more until there’s a catalyst to turn it around,” he told The Australian.

But later in the afternoon, the Australian sharemarket staged something of a recovery, with the S&P/ASX200 up 0.5%.

IG Markets analyst Ben Potter described the comeback as a short covering relief rally as traders look to take profits on their short positions.

“The Australian market got crunched early [this] morning as wave after wave of forced selling went through the market,” Potter wrote in a report.

“Once that subsided, the combination of short covering and bargain hunting has seen a pretty amazing rally.”

A spokesperson for the Reserve Bank said the RBA is monitoring market developments closely, and the RBA’s market operations continue to be conducted as usual.