Dollar dive: 40 US cents warningOctober 31, 2008 - 8:28AM The...

Dollar dive: 40 US cents warning
October 31, 2008 - 8:28AM
The Australian dollar may fall to a record low next year, possibly dipping below 40 US cents for the first time, as slowing growth in emerging markets cools demand for the raw materials exported by the nation.


The currency has dropped 31% since reaching a 25-year high of 98.49 US cents on July 16, sliding as prices of crude oil, gold and nickel declined. It reached 47.75 cents in April 2001, the lowest since it started trading freely in 1983.


"I can see it certainly dropping quite sharply from here," Carlin Doyle, a London-based currency strategist at State Street Global Markets said. The Australian dollar could fall "below the 40 cent level and I can see that happening in the next year or so," he added.


Australia's currency rose 5.3% to 68.43 cents at 7:03pm in Sydney, from 68.43 cents late yesterday in Asia.


The currency advanced to its July high as surging commodities prices and a benchmark interest rate of 7.25% helped attract investment. It has been the worst performer of the 16 most-traded currencies against the dollar and yen over the past 3 months as a seizure in credit markets fueled concern the global economy is headed for a recession.


Commodities account for about 60% of Australia's exports and the Reuters/Jefferies CRB Index of 19 raw materials has fallen 42% since closing at a record high on July 2.


"Because the Aussie dollar is liquid, the punishment for emerging markets undergoing a crisis will be paid through the Aussie dollar," said Doyle. "It's like a contagion."

But others believe the currency is not likely to fall to that level.

"I believe that 40 US cents is a unlikely, not because I'm hugely bullish commodity markets or think emerging markets will out perform, but because I don't believe that US dollar can strengthen that much," HiFX Australia senior consultant Thomas Averill said in an email.

"The structural concerns in the US economy that had weighed on the US dollar since 2001 still remain and have no easy resolution. "

Since September the Reserve Bank of Australia has reduced borrowing costs to 6% to boost its slowing economy. Traders are betting that the central bank will cut its benchmark rate by 136 basis points over the next 12 months, according to a Credit Suisse index based on overnight swaps. A basis point is 0.01 percentage point.


Bloomberg with Chris Zappone, Businessday

http://business.watoday.com.au/business/dollar-dive-40-us-cents-warning-20081031-5evh.html

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