Weaker Us Dollar Is Poised To Push Aussie Through Us80?

The Age

Tuesday November 28, 2006

STEPHEN McMAHON

THE dollar looks set to break through the US80? barrier in the next few months as global investors continue to sell the US currency on rising speculation that the US Federal Reserve's next move will be to cut interest rates.

The Aussie was helped to an 18-month high of US78.19? in early trading by a combination of weakness in the US dollar against most currencies, strong commodity prices and Australia's interest rate premium over the US. But by 5pm the Aussie had fallen back to US77.89?, still well last Friday's US77.52? close.

Investors will tonight closely dissect a speech by Fed chairman Ben Bernanke on the US economy for signs that the Fed will deliver a hoped-for interest rate cut in the first quarter of 2007.

US interest rate futures rate at just over 50 per cent the chance that the Fed will lower its overnight cash rate from 5.25 per cent by March. Last week, it put the likelihood at 40 per cent.

Last month's 25-basis-point lift in Australia's overnight cash rate to 6.25 per cent has given global currency speculators an attractive alternative to the greenback. The yield advantage of Australian 10-year bonds over their US equivalent has jumped to almost 1 percentage point, up from a six-month average of 0.85 of a percentage point.

"The move has been driven by US dollar weakness rather than Australian strength," said Deutsche Bank foreign exchange strategist John Horner. "However, having moved above US78?, a move up to the US80? - which has marked a high in the currency in recent years - can't be ruled out.

"A number of themes are driving the US weakness. The Fed may be easing rates in the early months of 2007 and also a diversification of central bank reserves away from US dollars and into other asset classes and currencies is also an underlying theme that has been driving US weakness in recent days. There is expectation of a widespread rebalancing (by several central banks including China's)."

But the effect on the Aussie of a strong commodity sector is emphasised by its hitting an 11-month high on the trade weighted index, which measures the currency against a basket of our main trading partners' currencies rather than just the US dollar.

A rise in the price of copper, zinc and nickel on Friday on the London Metal Exchange helped BHP Billiton edge up 10? to $26.22.

Despite the positive sentiment surrounding the Aussie, the S&P/ASX 200 Index was fairly static, closing down 1.4 points at 5452.2.

But the rise in gold prices, which is often a counter to a falling US dollar, sent Lihir to $3.05, up 15?. Newcrest, the country's biggest listed gold miner, rose 68? to $25.05 as the spot gold price jumped $US9.30 to $US640.90 an ounce.

Woodside moved up 33? to $36.47 on a lift in the oil price at the weekend that followed reports that OPEC might lower production for the second time in two months.

But the benchmark index was pulled lower, albeit only slightly, by the banks and consumer stocks.

The retailers were mixed ahead of the busy Christmas trading period. Coles Myer gained 4? to $13.63 while rival Woolworths slumped 15? to $21.49 - down from last week's record closing high of $22.09.

Qantas, proposed target of a $10 billion buy-out by private equity, rose 5? to $4.99 while Macquarie Bank, the lead member of the takeover consortium, fell 60? to $72.30.

Foster's continued to lose ground after its dramatic gains last week following rumours of a takeover that were later denied. The stock shot up more than 4 per cent to $6.97 on Thursday, but it closed it latest trading session at $6.78, down 11?.

ANZ led the index down, losing 17? to $27.96.

© 2006 The Age

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