Interpac Business and Migration Solutions Melbourne Australia

(Aug.9)

Update The Australian dollar sank briefly below parity with the US dollar just two weeks after trading at a post-float high above $US1.10, as investors panicked about the prospects for the global economy.

The Aussie dropped more than 3 US cents at one point to trade at $US0.9928 down from $US1.036 early this morning. It later rebounded to $US1.015 in recent trading in volatile markets on speculation that the US Federal Reserve will embark on a third round of stimulus spending to boost the US economy.

The dollar was also buying 71.3 euro cents, 62.2 UK pence and 78.5 yen - levels still well down on a week ago.

The local unit had been hammered by the global sharemarket plunge that accelerated this week, after credit ratings house Standard & Poor's downgraded the US debt to AA+ from AAA for the first time in its history.

The resulting jitters have knocked sharemarkets into bear territory - marked by 20 per cent falls from recent peaks - and sent investors searching for safety. On July 27, the Aussie dollar hit a post-float high of $US1.108.

"Even though the crisis comes out of the US, it seems the US dollar is a safe haven currency and the US Treasury market still remains safest bond market in the world despite the downgrade," said Kathy Lien, currency director at New York-based forex house GFT on a visit to Australia.

"Even though the outlook for Australia and the stablity of the country make it look attractive, I wouldn't stick my hand out and start buying the Aussie until we get more stabilisation in the market," she said, noting there could be further falls in sharemarkets in Asia.

The dollar's slide also reflected investors' changing view of the Reserve Bank's interest rate intentions.

Investors this morning tipped the RBA would cut its cash rate by 75 basis points to 4 per cent when its board next meets on September 6. In a year's time, investors are betting the rate will be lopped to 3 per cent - the level the cash rate reached during the global financial crisis.

Moves of that size are rare, but the RBA slashed rates by 75 and 100 basis points during the GFC in late 2008 and early 2009.

The Australian dollar had benefited in currency markets because of the higher interest rates held in Australia relative to the rest of the developed world. The RBA's cash rate is 4.75 per cent, well above the near-zero interest rate held by the US Federal Reserve and the 0.5 per cent rate held by the Bank of England. Currencies values are highly correlated to their interest rates held at their respective central banks.

The Australian dollar has been used as a proxy for overseas investment in Asian growth, which has come under a cloud since the latest market disruptions. Finally, prices for commodities, which often move in tandem with the Aussie dollar, have tumbled in this week's market rout.

Clifford Bennett, chief economist at Sydney-based Empire Economics and The White Crane Report, predicted the Aussie could dip under parity with the US dollar "in this circumstance".

"But any dip under parity in this circumstance would be such an amazing opportunity for our exporters to hedge their foreign receipts.

"If you don't take advantage of this, how do you face your board tomorrow?" he said.