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Dollar tipped to dip below parity

Weaker commodity prices and the forecast of lower interest rates have combined to put the dollar on track to touch parity with the greenback or drop below it in the second half of the year, analysts say.

The dollar fell one-third of a US cent to $US1.034 today after weaker-than-expected producer price data was released, fuelling speculation that lower official interest rates would come next month.

The Aussie is down 3 US cents from March 20 and more than 6 US cents from a post-float high of $US1.10 in late July 2011.

The Australian dollar has soared on a combination of factors in recent years, with one of the major causes being the commodities boom. Commodity currencies such as the Australian dollar or Brazilian real typically appreciate along with the rise in value of a nation’s resource exports.

But the outlook for coal and iron prices has weakened recently, as China’s growth has switched to a lower gear. Last week, for example, official data from the Australian Bureau of Statistics showed that weakening ore and coal prices pushed export prices down by 7 per cent in the first quarter of 2012.

Based on the slump in export prices, the nation’s terms of trade, or the price paid for a nation’s exports compared with the cost of imports, has fallen 9.5 per cent since in the past half year.


Market Economics managing director Stephen Koukoulas noted that even as the terms of trade dropped, the value of the Aussie has risen by 1 per cent in trade weighted terms.

“One reason why the gap has opened is unambiguously the interest rate structure that has prevailed for the last four months as the RBA has refused to lower official interest rates,” he wrote on his blog.

The RBA has kept rates steady at 4.25 per cent since December, despite the expectation of lower rates from the market. Currently the market is predicting a rate cut from the Reserve Board when it meets again on May 1.

“The Australian dollar looks like a bubble that is getting a little bit of extra inflation from the RBA policy stance, but that can and will change in the months ahead.”

Economist Justin Smirk from Westpac Economics, which correctly predicted the RBA’s November and December rate cuts, said the Aussie was likely to fall back to parity with the US dollar around June, because “of declining commodities prices, rate cuts, and more global uncertainty”.

OzForex senior FX manager Jim Vrondas agreed that the Aussie dollar would likely sink to parity or below in the second half of the year.

The Australian dollar looks like a bubble that is getting a little bit of extra inflation from the RBA policy stance.

Mr Vrondas said there was the likelihood of further flare-ups in the European sovereign crisis, after the International Monetary Fund announced last night a fresh series of pledges by countries for a $674 billion “global firewall” aimed at propping up Europe.

“What will the European Central Bank and IMF do going forward apart from what they’ve already done?

“We will be entering a period where risk will be off the table on the back of Europe,’’ he said, which would sap the Aussie’s strength against the greenback. ‘‘At same time we’ll have a period of low global economic growth.”

If the Aussie held at or above $US1.02 the dollar would remain range bound between $US1.02-$US1.05, he said. Should it pass below $US1.02, it could sink below parity, he said, although he expects a gradual decline rather than sharp drops in its value.
But even if the Aussie slides under parity, Westpac's Mr Smirk believes it could regain ground later in the year, based on an improving global economy.

“We’re looking for a recovery in China in the second half of the year and that will support commodity prices,’’ he said.

Westpac Economics believes the dollar could hit $US1.04 by year’s end, as the global economy slowly recovers.