Dollar's back to future
The dollar will end this year about US91¢ , according to the average of our economists, with only one tipping the currency to climb back to parity against its US counterpart.
On average, the panel forecast the currency to be US89¢ by the middle of next year.
The economists believe the dollar is overvalued, despite having lost more than 13 per cent of its value against the US dollar since mid-April. But they warned the Reserve Bank against intervening to bring it lower.
If the Reserve wanted to speed the dollar's fall, they said, it should stick to conventional means such as interest rate cuts and "jawboning".
"There is little doubt that the Australian dollar has been overvalued insofar as the currency has failed to appropriately reflect underlying fundamentals," Macquarie's global head of economies Richard Gibbs said.
Monash University's Jakob Madsen, said the Australian dollar was overvalued by about 10 per cent. The head of economics at the Australian School of Business, Nigel Stapledon, said "fair value" for the currency was "somewhere over US80¢".
Steve Keen, known as "Dr Doom", was the most bearish. Dr Keen, who was hailed for accurately picking the global financial crisis, said the dollar has been "absurdly overvalued ever since it exceeded US70¢".
Dr Keen expected the dollar to fall to US70¢ by the end of this year and remain trading at that level by the middle of 2014, adding he would not be surprised to see it slip even further.
In contrast, JPMorgan economist Tom Kennedy forecast the dollar to rise back to US100¢ by year's end and lift further to US110¢ by mid-2014.
The economists said they expected a pull-back of the US Federal Reserve's quantitative easing program would push the US dollar higher, and thus lower the Australian currency, which in turn would be a boost for the local economy.
They agreed on what the Reserve Bank should and could do about the strength of the dollar — nothing much. "A policy of benign neglect" towards the dollar should be continued, BT Financial Group's chief economist Chris Caton said, as any intervention to lower the currency would be "futile" given the strong influence of global factors on its movements.
Citi's chief economist Paul Brennan said the central bank should keep its jawboning strategy to talk the dollar down, while St George Bank's chief economist Hans Kunnen had a succinct response.
"The currency floats. Leave it alone! I.e. [Do] nothing."
Frequently Asked Questions about this Article…
Economists surveyed by BusinessDay expect the Australian dollar to finish the year around US91¢ on average and to trade near US89¢ by the middle of next year, after it has already lost more than 13% of its value against the US dollar since mid‑April.
Most economists in the survey expect the currency to remain below parity — only one forecast it would climb back to parity — although there are outlier views: JPMorgan’s Tom Kennedy predicted a rise to US100¢ by year‑end and US110¢ by mid‑2014.
Yes — several economists cited in the article said the AUD is overvalued. Macquarie’s Richard Gibbs said it’s failed to reflect fundamentals, Monash’s Jakob Madsen estimated it’s about 10% overvalued, and Nigel Stapledon put ‘fair value’ somewhere over US80¢; Steve Keen described it as “absurdly overvalued.”
The economists interviewed advised against direct intervention. They recommended a policy of ‘benign neglect’ and said intervention to lower the currency would likely be futile given global influences; suggested alternatives include conventional measures such as interest‑rate cuts and ‘jawboning.’
‘Jawboning’ refers to central‑bank officials verbally trying to influence the currency by talking it down. Citi’s chief economist Paul Brennan and others recommended the RBA could use jawboning as a non‑intervention tool to try to weaken the AUD through public statements and guidance.
Economists in the article said a pull‑back of the US Federal Reserve’s QE program would likely strengthen the US dollar and therefore lower the Australian dollar, a weaker AUD in turn potentially providing a boost to the local Australian economy.
Forecasts varied widely: the survey average was about US91¢ by year‑end, Steve Keen expected a fall to about US70¢ by year‑end (remaining around that level into mid‑2014), while JPMorgan’s Tom Kennedy was at the other extreme, forecasting a rise to US100¢ by year‑end and US110¢ by mid‑2014.
The article suggests Australians should get comfortable with a currency trading well below parity and expect ongoing uncertainty — economists largely see the AUD as overvalued and advise limited central‑bank intervention. Key drivers to watch are RBA policy, interest‑rate moves and any changes to US Fed QE, all of which influence the AUD and can affect trade, imports/exports and investment returns.
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