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Why our dollar is heading to parity

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by Peter Switzer

Twice this week, a Sydney FM radio station newsroom called me to explain the strength of the Aussie dollar. And, of course, the killer question of the moment is will it reach parity?

Economists believe that real people are preparing for parity parties and possibly the very suggestion that is being promoted by the media could actually make it happen.

Will parity happen and when are two questions I will put aside for a moment while I explain why the Oz dollar is currently growing as if it is on steroids.

Why the dollar is in the 80 to 90 US cent level is best explained by China’s demand for our resources — iron and coal in particular. However, the recent burst to US99 cents-plus is linked to the US central bank’s plans to increase the US money supply, which has been nicknamed QE2 as it would be a second round of quantitative easing.

The aim would be to increase the US money supply to drive down interest rates at US banks which, hopefully, would boost consumer as well as business demand kickstarting the US economy into a higher economic growth rate.

This will help the global recovery, global stock markets, demand for resources and that’s why our dollar goes higher. And, of course, there is speculation by people who understand this story — these people demand the Oz dollar to make a profit, which pushes the currency even higher.

Another part to the US story is that as the money supply increases, there are more US dollars in circulation and that devalues the overall currency. This sounds bad but it helps US exports, cuts down imports and helps raise demand for US goods and services. This in turn helps future job creation.

When will parity happen?

So, when will parity happen? I don’t know but I suspect soon, though there seems to a psychological barrier to seeing one Oz dollar equalling one greenback.

Once the level is broken, it would not surprise me to see it head even higher. I think we will see a good US reporting season, followed by US mid-term election, which will favour the Republicans and QE2 around the same time.

This should help Wall Street rally into Christmas and could take our dollar with it.

Note I use the word ‘could’. The Oz dollar is not an easy beast to predict and after teaching economics at the University of New South Wales for over 13 years I know how the direction of the currency can contradict what economic theory tells you should happen.

When I am asked to predict the Oz dollar at business speeches I always jokingly reply: “It will go up or go down or stay the same!”

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, October 14, 2010