The Australian dollar has gained about seven US cents since September 1 to touch a 26-month high of 96 US cents on Wednesday night (AEST), amid economic data showing a weakening US economy and a strengthening Australian one.
The sharp rise in the Aussie has sparked parity talk among currency traders, who now speculate the currency will reach one US dollar in early 2011.
Rochford Capital senior consultant Tom Averill said if the local unit reached parity with the US dollar, it would impede exports, but lower inflation and give the Reserve Bank of Australia (RBA) reason to keep the cash rate on hold.
“In the long term, I do belive parity will be broken,” Mr Averill said.
“A strong currency keeps a lid on inflation, so if the Aussie was to get to parity, I think the RBA may be looking at that closely and it could give them reason to adjust the rate. Not cut it, but pause their hiking.
“In the long term, they could look to cut the rate, depending on the outlook and the reality of the situation.”
An increase in the exchange rate has a similar effect to a rise in interest rates because both depress activity in the domestic economy.
Exporters become less competitive as the prices they charge increase in foreign currency terms and local companies find it harder to compete with importers.
Also, the tourism industry loses customers to overseas destinations, which become relatively cheaper.
Still, the Aussie has to be at parity for an extended period of time to have a significant slowing effect on the economy.
If the Australian dollar reaches one US dollar it will be the first time since the currency was allowed to trade freely in December 1983.
Speculation that Australia’s central bank will raise interest rates again has been a significant reason for the Aussie’s rise, in particular over the past week.
On Monday, RBA governor Glenn Stevens said in a speech in regional Victoria that Australia’s strong terms of trade and an above-trend economic outlook would mean the RBA would have to manage a “fairly robust upswing”.
“Part of that task will, clearly, fall to monetary policy,” he said.
The Australian dollar started on Monday at 93.78 US cents. It closed – after Mr Steven’s speech – at 94.78 US cents.
Tuesday was the same. The RBA said in the minutes of its September meeting that if strength in the economy continued, higher interest rates would be required.
The local unit rose another cent to 95.53 US cents in overnight trade.
The futures market is now pricing an even chance the RBA will take the cash rate to 4.75 per cent in October from 4.5 per cent.
If that happens, it will be the central bank’s first rate hike since May.
A 25 basis point rate rise adds about $50 to the monthly repayment of a $300,000 mortgage.