Australian dollar hits 23-year high against US

The Australian dollar reached its strongest level against the US dollar in nearly a quarter of a century on Monday, some commentators predicting it could reach parity in the coming months.

The Aussie jumped by more than one US cent, passing through the 90 US cent barrier to reach $0.9033 in trading in Asia, before ending the session in Sydney at $0.9016, its highest level in 23 years.

Yesterday’s rise marks an extraordinary run for the Aussie, which dipped to $0.77 in August on subprime fears. It also hit a 10-year high against sterling yesterday, ending at 44.17p in local trading. The rise was spurred by last week’s positive US jobs data, which have dimmed fears of a US recession and strong local equity markets.

More broadly, the Aussie – together with the New Zealand dollar – is benefiting from a revival in the carry trade, under which investors borrow in countries with low interest rates and re-invest in those with higher yields.

Australia and New Zealand have been relatively unscathed by the global credit turmoil that created the backdrop to last month’s 50 basis-point cut in US rates.

Australia’s official cash rate is at an 11-year high of 6.5 per cent, and the Reserve Bank is tipped to tighten monetary policy further in coming months.

At the start of the year it was almost unthinkable that the Aussie dollar could ever reach parity with the greenback,” said Craig James at CommSec in Sydney. What was once unthinkable is now being seriously entertained.”

The strengthening in the currency, however, is set to exacerbate the country’s trade deficit. In spite of the commodities boom, Australian exports have disappointed, partly because of infrastructure bottlenecks.

From an economic point of view this [currency surge] does bring difficulties and makes things tougher for our exporters,” said Peter Costello, Treasurer.

Currency strategists believe the Aussie is set for further gains. Marc Chandler at Brown Brothers Harriman said: There is little that Mr Costello can do to alter the Aussie’s direction.

Intervention is unlikely to limit longer term investment and, with a strong economy, the Reserve Bank is likely to remain hawkish.”

Australian dollar hits 23-year high against US

Financial Times
10/9/2007 6:20:25 AM