Dollar drops towards parity as global woes mount

Fears of a new financial crisis in the wake of Greece's elections have dragged the Australian dollar perilously close to parity with its US counterpart. Weak China data also dragged on the currency.

At 1700 AEST on Friday, the Australian dollar was trading at 100.27 US cents down from 101.18 cents on Thursday. It sank to as low as 100.18 US cents - its weakest level since December 21.

It was at  80.02 Japanese yen, down from 80.64 yen, and at 77.63 euro cents, down from 78.09 euro cents.

The currency is down about 4 per cent in May against the greenback.

Commonwealth Bank currency strategist Joseph Capurso said the Australian dollar was likely to fall below 100 US cents overnight as concerns about Greece continued to weigh on global markets.


"I think there is a good chance it will drop below parity," he said.

"The Greek issue has been pushing the Australian dollar down and that is likely to continue to be the case."

Angry voters

Voters angry at austerity measures, imposed in order to receive bailout packages from the European Union, rejected Greece's ruling coalition on Monday but failed to give any party a parliamentary majority in Greece.

So far negotiations between the parties have failed to yield an agreement to form a government.

If a government cannot be formed, new elections will need to be held next month, which would leave Greece unable to enact new austerity measures and put at risk its membership in the euro zone.

"That is leading to worries about whether Greece will be able to cut its budget deficit, otherwise it will undermine the European financial system," Mr Capurso said.

Mr Capurso believed the currency was likely to drop below parity with the US dollar during the European and US sessions overnight.

If so, it would be the first time it has been below 100 US cents since December 2011.

China disappoints

Chinese data out today was anything but encouraging with industrial production weakening sharply in April as investment slowed to its lowest level in nearly a decade.

Other figures showed China's consumer inflation moderated in April, potentially giving Beijing more scope to loosen policy to help the economy rebound.

The Aussie dollar is sensitive to news from China, which is major export market and a driver of prices for Australia's top exports iron ore and coal.

Commonwealth Bank analysts have lowered their forecasts for the dollar, and now expect the dollar to down to 98 US cents by June, well down from an earlier forecast of $US1.08.

But they remain upbeat on the longer-term outlook for the Aussie dollar, predicting that by year-end, the currency will bounce back to $US1.05.

"We believe more participants are using the AUD to gain exposure to the rapidly growing Asian economic region and are using the AUD to hedge their exposure to Asia because the cost of hedging the AUD is much lower than the cost of hedging less-liquid Asian currencies," they wrote in a report.

AAP, Reuters