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AUSTRALIAN DOLLAR STILL HOLDS ITS OWN ABOVE THE WORLDS JITTERS

Dollar shines despite global jitters

Chris Zappone

March 3, 2011 – 11:12AM

The Australian dollar’s latest surge against the greenback despite jitters in the global economy has experts pondering whether the currency may have entered an extended period of strength.

The dollar has long had a reputation as a risk currency – an asset bought in times of economic optimism and sold during times of fear.

But since November, the dollar has traded at or near parity with the greenback despite a steady stream of uncertainty in global and local markets.

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In the past three months, China has lifted interest rates, potentially choking growth in Australia’s biggest trading partner. The Middle East, meanwhile, continues to convulse with revolutions that are spiking oil prices and raising concerns about inflation and the strength of the recovery in the global economy.

And at home, the local economy has been battered by massive floods in much of the country, while cyclones have hit Queensland, Western Australia and Northern Territory. Some analysts think the economy may generate little or no growth this quarter as a result.

“Historically, you would expect the Aussie to be taking it on the chin,” said RBC Capital Markets economist Michael Turner. “The Aussie seems to have lost that risk proxy function to a degree.”

In the past year, the Australian dollar has risen almost 18 per cent against the US dollar, the strongest result among the 17 major currencies tracked by Bloomberg. It’s risen almost as much against the euro, at about 16 percent, more than 10 per cent against the yen.

Aussie appeal

Australia’s close and growing ties with China, the world’s fastest growing major economy, have underpinned the resilience of the local dollar.

China emerged relatively unscathed from the global financial crisis, with concerns now focused on the risks of excessive growth and resulting inflation. Some, though, see Chinese inflation as potentially a benefit for the country, particularly if it reduces the need for a major revaluation in the country’s currency, the yuan.

Australia’s relatively high official interest rates also add to the appeal of the Aussie dollar. The Reserve Bank this week kept interest rates at 4.75 per cent, while rates remain near zero in the US and Japan, and 1 per cent in euro-zone nations.

Those lures have so far outweighed most of the jolts resulting from soaring oil prices, helping to shore up demand for the dollar.

“We’ve thrown Libya, we’ve thrown Egypt, the earthquake in New Zealand,” said Westpac chief currency strategist Robert Rennie. “There are a lot of big one-off events, there’s a lot of global contagion and the Aussie is doing very very well.”

Even so, Mr Rennie hasn’t ruled out volatility, predicting the dollar will trade between 96 to 103 US cents for the rest of the year.

CMC chief market strategist Michael McCarthy said despite the Aussie’s newfound resilience, a pullback in commodities prices would likely drag the dollar lower.

If we were to see “swingeing measures from authorities” in China or India to head off potential inflation outbreaks in those economies, “that would have immediate effects on commodity markets and weigh on the Australian dollar.”

czappone@fairfax.com.au


March 3rd, 2011
Topic: Money & Investments, NATIONAL INTEREST, SALES IMPORT EXPORT Tags: , , ,

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