THE Australian dollar has surged to a two-month high, putting the squeeze on the economy and defying efforts by the Reserve Bank to curb the soaring currency.
The dollar broke the key US105¢ barrier early on Friday, defying a cut in interest rates and further entrenching its break from commodity prices, which have been a traditional driver.
And most analysts believe the dollar will stay high.
The jump in the dollar came as figures released on Friday show imports have started to gain pace. Australia posted its largest monthly trade deficit in more than four years, widening by $668 million to $2.1 billion. The increase was driven by weaker commodity prices and softer global demand, while the strong dollar weighed on export growth.
In the early hours of Friday the dollar peaked at US105.17¢, helped by a surprise fall in the jobless rate for November.
RBA officials, including governor Glenn Stevens, have expressed surprise at the persistently high dollar in the face of slumping commodity prices. But the central bank has stopped short of directly stepping in to influence the currency.
Economists said Australia's triple-A credit rating - one of just a handful of countries in the world to have one - was part of the reason why the currency remains high. At the same time, the official cash rate, while low by historical measures, is the highest among the developed countries.
The shrinking pool of countries with the top credit grade - Australia is now one of just seven left with a triple-A rating - means more global funds looking for investment havens.
''You generally welcome the fact that you've got a triple-A rating, [but] it's literally killing the economy with kindness, particularly the export-oriented sectors of the economy,'' Arab Bank Australia treasury dealer David Scutt said.
Both the US and France have lost their top ratings, while Britain and Germany are on a negative outlook for their AAA ratings, meaning 2013 could see more money being pumped into the Australian market and dollar, Mr Scutt said.
At the same time, QE, or quantitative easing, which has seen hundreds of billions pumped into the global financial system, has become a popular tool of monetary policy for the central banks of troubled economies this year.
Westpac's chief currency strategist, Robert Rennie, said the dollar had traded in the US102¢ to US106¢ range this year as central banks in the US, Britain, Switzerland and Japan engaged in quantitative easing. This had a depressing influence on yields offshore and increased the attractiveness of the dollar's yields to global investors.
''It doesn't really feel as if that story changes much next year,'' Mr Rennie said. He pointed to the prospect of more quantitative easing from the US, Europe, Britain and Japan.
Gareth Berry, UBS' director of G10 foreign exchange strategy, thinks the dollar will fall back to parity with the US dollar in the next three months, due partly to a stronger greenback and weaker domestic economy.
But he said currency watchers were quickly becoming fixated on the next quarterly capital expenditure report, due on February 28. He said it could be the most important data release of the year, from a currency perspective, because it would provide the first estimate of the mining sector's spending intentions for the next financial year.
''Foreign exchange economists are really tuning into … the peaking and subsequent receding of the mining investment boom. It's really a major topic of conversation,'' he said.
HSBC's chief economist in Australia, Paul Bloxham, said the divergence between the dollar and local economic conditions could pose a problem for the economy.
''If the currency were to stay high, even in the face of weaker conditions in the Australian economy, then the currency may lose some of its ability to absorb international shocks,'' he said.