Dollar sinks below parity on economy worries

May 14, 2012

Overseas travel and shopping from foreign websites will be less attractive as the cost in local terms rises for Australian consumers.

The Australian dollar sank recently to as low as 99.96 US cents after threatening to break back through the parity level for some time. It hasn't bought less than $US1 since December 21 last year.

Sydney-based FOREX.com market analyst Chris Tedder said a variety of factors had conspired against the currency, will overseas factors playing a big role.

‘‘We don’t have a lot of upside for the Aussie at the moment," Mr Tedder said. “On the downside, we’ve got political uncertainty in Greece, we’ve got the Spanish banks, and disappointing economic data of late both domestically and in our largest trading partner - China.”

“It’s painting a bearish picture for the Aussie,” he said. “From here we’re going to see it continue to slip lower,’’ he said.

China lift

Risk sentiment got a brief lift this morning after Sunday's move by the Chinese central bank to cut the amount of cash banks must hold as reserves by 50 basis points to 20 per cent, offering a cushion for a slowing economy, Australia's biggest trading partner.

That followed Chinese data on Friday, which showed industrial production weakening sharply in April as investment slowed to its lowest level in nearly a decade, while consumer inflation moderated in April.

Perpetual Investments head of investment market research Matt Sherwood expects the dollar to drop to as low as 98 cents as concerns about Europe bite into investor confidence.

"If Europe stays together, you could see the dollar going through 98 US cents," he said.

But if Europe deteriorates, China slows further and the US recovery continues to stall, the Aussie's risk is "to the downside" of 98 US cents, Mr Sherwood said.

Overshadowed

Westpac New Zealand senior market strategist Imre Speizer said concerns about the implications of Greece's political instability had overshadowed positive news out of China.

China's central bank, the People's Bank of China, on Sunday announced it would cut the ratio of capital reserves required to be held by financial institutions within the country, to stimulate the economy.

"Usually that would elicit a positive response from the Australian dollar and it did bounce a little bit but you would need a microscope to see it," Mr Speizer said.

"That suggests that the market is quite nervous about developments in Greece."

Mr Speizer said the Australian dollar was likely to fall sharply if it dropped below parity on Monday.

"It might hold (above parity) for a little while but nobody really knows," he said.

"But if it does break it is likely to be a powerful break."

Greece moved closer to fresh elections on the weekend as talks between political parties, who are divided over austerity measures, failed to establish a coalition government.

Voters angry at the austerity measures, imposed in order to secure bailout funding from the European Union, demolished the ruling government at last week's poll but failed to give any party a parliamentary majority.

If the country is forced to hold new elections it will be unable to enact further planned austerity measures in the next month, putting at risk the bailout funding and the country's membership in the eurozone.