Dollar Holds Over 80 USc

By Glenn Dyer | More Articles by Glenn Dyer

The Australian dollar closed over the 80 USc mark on Friday; another first as it was the first time it ended a trading week above the 80 US cent mark for a decade or so.

The dollar closed at 80.050 USc: and opened a touch firmer today.

It was up more than half a cent on the previous Friday.

But now that the currency has made it through that level and remained there for most of a trading week, some analysts reckon there could be a chance it might go higher.

The AMP’s Dr Shane Oliver says there’s a chance it may head on higher in the short term perhaps to the 1996 high of 82.14 USc, “or maybe even overshooting to the 1989 high of $US0.8950”

“But it is hard to see it being sustained as it is becoming very overvalued with fair value around $US0.70 on our estimates. If the latest surge in the $A continues and is sustained then manufacturers and farmers will really start screaming,” he said in his latest comment.

” While great news for consumers who should see lower prices for things like petrol, cars, electronic goods, clothing and overseas travel if the surge in the $A is sustained, it is bad news for Australian exporters and companies competing with imports.

“The latest surge in the $A also presents a dilemma for investors because if the $A continues to rise it will reduce the value of international equity investments and would argue for these investments to be hedged back into Australian dollars in advance.

“On our analysis fair value for the $A is around $US0.70 so at current levels it is already overvalued and it is pushing into levels that have in the past marked tops (see chart).

“This is very different to the situation in 2002 and early 2003 when the $A started to head up from very undervalued levels and so there was a reasonable degree of confidence that it would keep going and be sustained for a while.

“So right now it is a bit harder to justify hedging a big portion of international equity exposures into Australian dollars. Investors prepared to take a longer term view should in fact be considering taking advantage of the strong $A to increase their exposure to foreign assets on an unhedged basis.”

On share markets, Dr Oliver said that “while shares have retraced much of the falls experienced during the recent correction, there is still a risk of turbulence ahead in the short term.

“Uncertainty over US and global growth may linger for a while yet, the crisis in the US mortgage market has further to run, investor sentiment has yet to reach bearish extremes that normally signal market bottoms and the last three significant corrections in global/Australian shares (March/April 2005, October 2005 and May/June 2006) all lasted about a month or so and were somewhat deeper than the recent correction has been.

“Nevertheless, while the very short term outlook may be a little uncertain, our view remains that the four year old bull market in shares is alive and well.

“Valuations both globally and domestically are reasonable, profit growth is slowing but is still likely to be solid, the current slowdown in global growth will help to sustain the low inflation/low interest rate economic expansion and there is lots of cash out there looking for a home.

“As such, global and Australian share markets are likely to provide solid gains for the rest of the year, notwithstanding occasional set backs.

“Listed property securities – both globally and in Australia – after being extremely overvalued on our measures in mid- February have since fallen back to around fair value.

“From their peak levels in late February US REITs have had a 13% fall and Australian listed property trusts have had a 9.5% correction.

“Bond yields are likely to have further downside in the short term on the back of slowing global growth.

“However, with yields already relatively low returns will be modest.”

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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