Which way next for the Aussie dollar?

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The Aussie dollar reached parity with the US greenback in October 2010 and has maintained its strength since. But how much longer can this run last?

"What goes up must come down" might be an essential feature of gravity, but many others believe the Aussie dollar is held to the same principal.

The dollar reached parity with the US greenback last October – the first time since it was floated in 1983. Since then, the dollar has inched upwards nudging $US1.10 in early May.

The high dollar has been a boon for shoppers – making imports cheaper, cutting costs of overseas holidays and even keeping petrol prices in check.

Some are even speculating that good times are not over yet – forecasting a long climb, reaching  $US1.70 by 2014.

“I do note that there were a lot of calls for $1.20US or $1.30 against the US and I point out that’s usually a sign for a top in the market – once we start extrapolating very strong moves into the stratosphere that’s a sign that everyone has become bullish and that means there’s nobody left to buy the underlying security and that the direction in the short-term tends to reverse. And I think that’s why we’ve seen the fall-back from $1.10 to $1.05,” explained chief marketing strategist at CMC Markets, Michael McCarthy.

According to McCarthy, there are three main drivers of the strength we’ve seen over the last six months:

1.)    a flood of US dollars,

2.)    commodity demand driven by China, India, Brazil and Russia,

3.)    and interest rate differentials between Australian interest rates and other countries around the world.

“Of those three drivers, it’s clear that the tap has been turned off on US dollars. At some stage in the next 9-18 months, those dollars will be withdrawn from the market. And that will lead to US dollar buying and Aussie dollar weakness against the US dollar,” McCarthy says.

But on the commodity front, demand remains strong, he adds. And interest rates are expected to inch upwards in Europe and the US, eventually closing the difference between rate differential between those economies and Australia.

“So in other words – we’ve knocked off one driver – US dollars, the commodity driver remains in place and the interest rate driver is a bit mixed, and for that reason I do expect the Aussie dollar to move in very broad terms in the next 12 months between the high we’ve seen at $1.10 and a low somewhere between .92 and .97 cents,” he says.

“In summary, I’m looking at a fairly sideways market.”
So what does this mean for Australians? Basically, we’ll get the benefits of terrific buying power for a little while longer.

But there are some downsides to the dollar high.

“We sometimes get a bit carried away and tend to cheer when the Australian dollar rises, but in economic terms it’s not always a benefit and certainly industries like tourism, consumer discretionary stores are seeing some very negative impacts of this high Australian dollar, with Australian tourists heading oversees rather than holidaying at home. And a lot of Australians consumers are buying online, taking advantage of that strength in the Australian dollar and directing a lot of those purchases now overseas.”

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