Aussie dollar seen equalling U.S. dollar next year

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By David McIntyre
Bloomberg News Service
Tuesday, October 2, 2007

http://quote.bloomberg.com/apps/news?pid=20601087&sid=ar4B13PRXC7A

SYDNEY -- The Australian dollar will trade equal with the U.S. currency by the end of 2008 as the central bank raises interest rates to control inflation, according to Stephen Koukoulas, global strategist at TD Securities Ltd.

The local dollar, which reached an 18-year high of 89.50 U.S. cents today, will rise to parity as the economy expands by more than 4 percent next year and inflation accelerates, Koukoulas said in a note to clients dated yesterday. The currency will climb by more than 12 percent as the Reserve Bank of Australia raises its benchmark rate from an 11-year high of 6.5 percent, he said.

"Fundamentals suggest the Australian dollar can rise through parity with the U.S. dollar over the next year," wrote Koukoulas, who is based in London. "Inflation is being unleashed."

Overseas shipments of raw materials, contributing about 14 percent to Australia's economy, helped drive 4.3 percent growth from a year earlier in the second quarter, the biggest increase in three years. The International Monetary Fund last month raised its forecast for Australia's growth in 2008 to 4 percent from an earlier prediction of 3.3 percent.

Australia's rate advantage over the U.S. widened to 1.75 percentage points last month as the Federal Reserve cut its target for overnight lending rate between banks by a half percentage point to 4.75 percent.

"If we are correct to assume at least one more Fed cut and at least one more RBA hike, this gap will widen to 2.25 percentage points," Koukoulas said.

Since Sept. 18, when the Fed cut its overnight lending rate between banks, the currency has risen 4.4 percent to 88.98 cents as of 12:11 p.m. in Sydney. The Australian dollar will trade at 80 cents by the end of 2008, according to the median estimate of 23 strategists surveyed by Bloomberg.

The currency will also benefit as global growth boosts the prices of commodities Australia exports, according to TD, a unit of Canada's Toronto-Dominion Bank. Demand for commodities such as gold, iron ore and nickel have pushed Australia's terms of trade, which measures the prices a country gets for exports compared with those paid for imports, to the highest since at least 1959, according to Bloomberg data.

"The outlook for the Australian dollar is clearly up," Koukoulas said. "Arguably, the Australian dollar has lagged well behind the terms of trade lift."

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