By Sam Holmes –
The Australian dollar is expected to lose steam in the new financial year as commodity prices fall to more realistic levels.
Economists and currency experts have disparate views on where the dollar will be this time next year but most agree the market is unlikely to see the heights of 2004-05 in the next 12 months.
The local currency kicked off 2004-05 at US69.94c and finished the year trading between US76c and US77c, after falling shy of the US80c mark in March.
At the 5pm official close yesterday, the dollar was trading at US76.4c, up from US76.25c on Wednesday.
Commonwealth Bank senior economist Michael Workman said commodity prices were likely to fall as the difference between Australian and US interest rates shrank, taking the currency down to US73c by December.
The dollar was expected to reach US70c by June 2006.
“That’s based on a view that the US dollar continues to rise against the euro but not so much against the yen,” Mr Workman said.
“The general run of metals prices peaked around April/May, we think, and they’re headed lower through this year.”
UBS Investment Research economists said high commodity price levels were not sustainable in the medium term.
“Just how much they moderate, however, remains a contentious issue among investors,” UBS said.
“While we believe the level of commodity prices will provide support for the Australian dollar, the Australian dollar remains vulnerable to a sharp correction in commodity prices.”
ANZ senior currency strategist Craig Ferguson said the market was on the verge of a spike because of trader wariness about risk, thanks largely to soaring oil prices.
He expects the dollar to fall to US66c by the end of 2005 and US65c by June 2006.
“At the moment the futures curve in oil says that it’s going to be above $US60 for the next year and a half,” he said. “If that’s the case, it’s going to reduce global growth and it’s going to cause margin compression for companies because oil is a key input into operations.”
But State Street Asia Pacific head of research Harvinder Kalirai said there was still life in the commodity price cycle, pointing to further gains for the currency.
He said it was possible the local dollar could hit US85c in a year’s time.
Source: Sydney Morning Herald