The Australian dollar continues to head towards the $US1 parity level (and beyond) after hitting new two year highs on Friday night.
The same force that drove gold over $US1,300 an ounce Friday night, is working to push the value of the Australian currency higher.
That’s the fear of the US Federal Reserve joining the Bank of Japan and the Bank of England in what’s known as quantitative easing, or spending more money to pump cash into the economy to try and jolt it into growing faster.
It’s a devaluation of the US dollar that is working, unlike in Japan where the extra spending has had no impact on the value of the yen which has risen to the point where the government had to sell the currency two weeks ago to try and halt its rise.
The Aussie currency topped the 96-US-cent mark in US and European, touching 96.15, before easing to finish at 95.92 on Saturday morning.
That’s just under the 25 month closing high of 95.99 USc reached earlier in the week.
Since September 9, when the dollar was buying 91.90 US cents, the Aussie has risen 4.6%, and 8% since late August.
Driving it is the combination of high returns, a strong commodity-dominated economy and the weakness in the US dollar as the Federal Reserve primes the market for another round of quantitative easing.
The dollar has risen from just 81 USc in May during the euro crisis because risk was risky and investors headed for the security of the Japanese yen and the Swiss franc, as well as the US dollar.
But as these fears eased and the appetite for risk returned, and (talk of interest rate rises from the Reserve Bank since the September board meeting) foreign investors have returned to the currency in droves.
The increasing talk of another round of quantitative easing (effectively printing money) by the US Federal Reserve has added to the move into the Aussie dollar, as well as gold and commodities as the US currency has fallen in value against all major currencies.
Attempts by the Japanese government to drive down the value of the US dollar by selling their currency and buying greenbacks (and not moping up the extra money created by the sales) has added to the fears about more central bank easings and added to the attraction of commodities and linked currencies, such as the Aussie and the Canadian dollar (called the loonie).
Now that the Reserve Bank is widely expected to lift the cash rate to 4.75% next month, and possibly to 5% by the end of the year, has seen more money chase the Aussie.
This pressure is not going to ease while the RBA is in tightening mode and as the economy continues expanding.
Not even a worsening in our trade performance this quarter and in the final three months of the year (from lower contract prices for iron ore and coal and the impact of the higher value of the currency) will dent the attraction of the dollar.
Where else in the world can investors get 4%- 5% in a AAA-rated economy by just investing in cash or near cash securities?
That it is getting increasingly expensive seems not to deter them (except for investors from Japan and from Switzerland).
But at this level, the currency could quite easily take a big knock and fall quickly, back to the low 90s or less.
The AMP’s Dr Shane Oliver says that "After an 8% gain since late August which has taken it to a 26 month high, the Australian dollar is vulnerable to a correction.
"However, further gains in the value of the $A are likely on a six to 12 month horizon as it becomes clear that the global recovery is continuing and commodity prices are remaining strong, the US Federal Reserve embarks on more quantitative easing and Australian interest rates continue to rise well above global rates."
The November meeting of the Fed now looms as an important milestone because that’s when it is expected to reveal if the extra spending will happen.
He says for the share market, this means shares are also vulnerable for a short term correction after the strong gains in September so far.
"However, while near-term uncertainties remain, shares are likely to see further strong gains into yearend and through 2011.
"Shares are very cheap relative to government bonds, investors are still very bearish which is positive from a contrarian perspective, and once it becomes clear that the US/global recovery is continuing (albeit slowly) there is likely to be a big reversal of investment flows – out of government bonds and back into shares.
And remarks on Friday by Federal Reserve Chairman Ben Bernanke will only add to the upward pressure on the Australian dollar (and gold and other commodities).
He said at a function in New York that it was unclear whether the US economy would be relegated to the type of slow recovery that typically follows a financial crisis.
Acknowledging the economy was growing less than the central bank would like, Bernanke noted that recoveries following financial crises historically have been more sluggish than rebounds from normal recessions.
However, he said it was not clear if that was because of the unusual economic headwinds financial crises create or because past policy responses have not been aggressive enough, saying he hoped the current recovery escapes that fate.
"It could be that financial crises lead to slow recoveries because of the headwinds created by deleveraging, by bad assets, by problems in the banking system and the like and I’m sure there’s some of that" in the current U.S. episode, he told a group of scholars at Princeton University.
"But i
