Australian dollar could dive below 90 US cents in coming weeks

There are predictions that the Australian dollar could fall as low as 90 US cents in the coming weeks and months.

Not that long ago, the Australian dollar could do no wrong.

However, its recent demise - down more than 8 per cent this year and more than 2 US cents since Australia's budget night - is more about the rebounding US economy that anything else.

With business conditions on the mend in the United States, traders are switching their bets to get in early on the rising greenback.

JP Morgan senior economist Ben Jarman says, while the US revival is the overriding factor, Australia's lacklustre outlook is not helping either.

"Most people started the year looking at the US saying this is an economy that was really going to struggle given the fiscal tiding that was going to unfold over the year," he said.

"We're close to halfway through the year now and, if anything, it's probably beaten expectations slightly."However, Mr Jarman says the Aussie dollar's decline is not all about the greenback's rise.

"I do think there is some of that, but I think as well people are also starting to question the long-run growth story in Australia, and particularly where the uplift is going to come from once mining investment activity hits its peak," he added.

Aussie dollar: What goes up...

By 3:35pm (AEST) the Australian dollar was back at 97.8 US cents, after falling as low as 97.22 US cents at the weekend.

However, the next trigger for a move could come later this week when the chairman of the US Federal Reserve, Ben Bernanke, gives his latest update on the US economy.

Read: The man who predicted the fall of AUD

Economists such as Ben Jarman will be looking for any signs of when the Fed will scale back its program of quantitative easing - currently $US85 billion of money printing every month.

"That's feeding into questions of when will Bernanke see fit to taper off the pace of asset purchases, so his speech this week is apparently going to be on economic prospects for the long run," he said.

"So you can only imagine that within that he will be laying out the case for just how long they will be able to stay accommodated for.

"In our view they'll still be doing QE until around about the end of the year, when they'll start tapering the purchases a little bit, but we'll still have very, very low interest rates until well in 2015."Good for businessThe falling Australian dollar will take a while to work its way through the Australian economy where exporters have been struggling with parity and above.

Greg Evans, the chief economist at the Australian Chamber of Commerce and Industry, says the Australian dollar's recent slide below parity is a little bit of good news for many firms.

"It will certainly be welcomed by the trade-exposed part of the economy; all those involved in exports," he said.

"Certainly from a small business point of view, we see those companies in the manufacturing sector, in the tourism sector, and also increasingly in the provision of education services, and all these industries certainly struggle for profitability at the sort of levels we've seen for the last several years, around parity levels."However, Mr Evans says it will take some time at lower levels for the positive impact of the Australian dollar's fall to feed through to profitability and competitiveness.

"The level of the dollar is just one influence on profitability; we don't want to over-estimate it, but it's certainly clear there are other factors including new taxes and low confidence levels that are affecting small business at the moment," he said.

"I think this is something that will start to seep through over time - it's certainly not an overnight remedy, and it of course would need to be sustained."The Australian dollar was also lower against other major currencies such as the euro - having hit 85.88 Euro cents in July last year.

Although Europe's debt crisis is deepening, the likelihood of a major shock is being factored out, and that has pushed the dollar back down to around 76 euro cents.

"I don't think anyone's particularly excited about the growth outlook in Europe.

I mean, the numbers do keep coming in on the lower side," Ben Jarman observed.

"But what we can say is the risk of a very severe financial system shock has diminished over time, so we now have enough supports for the system through ECB liquidity and the movement towards banking union and the like that people are a little less worried about Europe.

"So people are taking out that risk premium that they had there in the euro against all currencies, including the Aussie."The Australian dollar hit 48.39 US cents in March 2001 - the lowest since the currency was floated in 1983.

More recently, the ten-year average has been around 86 US cents.

However, with the US economy showing real signs of life, there are expectation the dollar could slip through 97 US cents this week and maybe settle as low as 90 cents by the end of the year.

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    0.9268-0.0019-0.21%
    AUDUSD=X
    0.5519-0.0016-0.29%
    AUDGBP=X
    0.6704-0.0017-0.25%
    AUDEUR=X
  • Commodities
    Commodities
    NamePriceChange% Chg