Dollar to slip below parity 'within days'

Since climbing almost to $US1.11 in late July, the dollar has weakened as the European debt crisis rattled global markets and the Reserve Bank of Australia has softened its tone on the need to push interest rates higher.

The Aussie dollar caught the latest down-draught earlier today, dropping its lowest level in more than five weeks when US ratings agency surprised investors by cutting its debt rating for Italy. That announcement saw the dollar dip to as low as $1.014 before bouncing higher.

Part of the currency's recovery was courtesy of the RBA. The release of the minutes from its September meeting - when it left its key cash rate on hold for a ninth straight meeting -  were interpreted by traders to mean a rate cut is not imminent.

That view pushed the dollar back briefly above the $US1.02 mark. Overseas worries, though, stymied any rally.

Among the fresh concerns was a Reuters report that one of its large state-owned bank had halted some types of currency trading with major French banks because of the debt crisis escalating in Europe. The Chinese bank also stopped trading with UBS in the aftermath of its $US2.3 billion loss from a rogue trader.

Bleak outlook

Westpac chief currency strategist Robert Rennie said the late-morning rebound of the Australian dollar may be temporary with little news on the horizon that to keep the dollar from slipping back to parity.

"Europe is heading towards a recession; [the] US economy is heading towards a double-dip recession and Asia is slowing. That makes the Australian dollar less attractive," said Mr Rennie. "We will continue this slide back towards parity."

A drop in the dollar, of course, will be cheered on by companies trying to export, including those dependent on foreign tourists or students. Still, the relatively strong Australian dollar has helped keep a lid on inflation through cheaper imports - without which, the RBA may well have lifted official interest rates even higher than they are now.

And of course, market analysts change their view on the outlook for the dollar and other assets almost by the minute. Just a couple of months ago, some commentators were tipping the dollar would go to as high as $US1.20 as the US deliberately drives down the value of its currency in a bid to help spark faster growth.

Mr Rennie, though, thinks the Aussie dollar is pointed very much in the other direction, and may drop as low as 95-97 US cents by June next year if not sooner.

"As we move into October, November and December we're going to see the low moving to the 95 US cent level with $US1.01 to $US1.02 upper end of the very volatile swings we're seeing at the moment."

One of the biggest drags on the dollar has been the diminishing chance of an interest rate rise. Speculation is swirling that the Reserve Bank will cut rates to spur a slowing economy in which confidence - both for businesses and consumers - is fragile.

Travelex head of dealing Bernie Tuck said the RBA will probably leave rates where they are ''for as long as possible.''Mr Tuck said any drop by the Australian dollar to parity would have to overcome support at about the $US1.01 level,. Even so, the currency remains ‘‘very vulnerable’’ both to pressures emanating from the European debt crisis and the weakening US economy.

"We’ve traded below parity over the course of the last six to seven weeks so nothing is out of the question,’’ said Mr Tuck.

Default worries

TD Securities FX and rate strategy head Annette Beacher said if Greece defaults on its debt, at its current level the Aussie would likely drop below the value of a US dollar. ‘‘You can’t rule out a swift return to parity,’’ she said.

Investors have been jittery over Greece’s sovereign debt crisis with some expecting the nation to default within days, triggering contagion among banks in Europe.The market gives a rate cut a 60 per cent chance when the RBA meets next month, down from 90 per cent just before the release of the RBA minutes.

More to the point, though, investors remain certain that the cash rate will be well below the current 4.75 per cent level in a year's time, pricing in the equivalent of six rate cuts by then to 3.25 per cent, according to Credit Suisse data. So long as the market's take such a dim view on rates, the Australian dollar will struggle to regain its earlier appeal.

czappone@fairfax.com.au

This reporter is on Twitter: @chrizap

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