The Australian dollar's surge to a more than two decade high versus its US counterpart has ignited talk it will reach parity next year, buoyed by prospects of higher domestic rates, robust growth and strong commodity prices. But while irrepressible for now, strains in global credit markets could knock the wind out of the high-flying Aussie, a favourite of investors for its yield appeal, analysts warn.
The Australian dollar charged past 93 US cents this week to its highest since April 1984, driven on by wildly diverging monetary policies in the United States and Australia, swelling gold and commodity prices and stunning strength in the domestic economy.
"I certainly would not rule out a move towards parity by February," said John Kyriakopoulos, currency strategist at National Australia Bank. It would be the first time since 1982 that one Australian cent equalled one US cent, making big winners of all the investors and speculators, including major sovereign funds, that have been avid buyers in recent months.
Australians would also be relatively richer, with consumers able to afford more foreign goods as import prices fall. That in turn could dampen inflationary pressures, helping a central bank struggling to contain price rises in a red-hot economy. Still, it would make life tougher for exporters, particularly companies with large US dollar revenues like Foster's Group Ltd, the world's second-largest winemaker. Currency pressure can be an impetus for efficiency by forcing companies to become more productive, but in the near term, pain will be felt.
"Parity is a real possibility," said Craig James, chief equities economist at CommSec. "US interest rates are falling, Australian rates are more likely to rise." "But each step higher is making it more difficult for Australian exporters, farmers, manufacturers and the tourism industry."
Once known as the "Pacific Peso" and the "Little Aussie Bleeder," the Aussie has made a remarkable turnaround from an all-time low of 47.73 US cents in April 2001. It has risen nearly 16 percent since the start of 2007 on the US dollar. And its upward momentum looks intact. Australia's central bank is expected to raise the cash rate by a quarter of a percentage point to an 11-year high of 6.75 percent next Wednesday, and financial markets are pricing in at least one more increase in the next 12 months as the Reserve Bank of Australia (RBA) seeks to fight inflation pressures.
"The economy remains strong and interest rates remain under upward pressure, whereas the US economy is weak. Beyond that, the Australian economy, and the Aussie, continue to enjoy the long-running boom in the global economy, and in particular the emergence of China as 'The World's Factory'".
Indeed, credit jitters resurfaced this week as worries over banks' exposure to toxic debt triggered a flight out of carry trades - where investors borrow in cheaper currencies such as yen to buy higher-yielding currencies like the Aussie.
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