Sensible approach by the little Aussie battler

There's an old saying in the economics profession that there two types of economists - those who can't forecast what the Australian dollar is going to do and those who don't know that they can't forecast what the Australian dollar is going to do.

It is therefore with a degree of fear and uncertainty that I'm daring to writing about the Aussie as it trades above 98 US cents for the first time in a quarter century, apparently determined to reach parity with the greenback sooner rather than later.

As another old saying goes, given an infinite number of monkeys and an infinite number of typewriters, one of them will write the complete works of Shakespeare. There are a lot of economic forecasters around taking a punt on where our currency is going, so inevitably one or two occasionally enjoys a run of seeming to get it right - but the run never lasts. No-one has a consistent track record of forecasting the dollar's movements with reasonable accuracy.

So, having made all my excuses and apologies up front, what's the Australian dollar doing? Good question...

On one hand, the currency formerly known as the little Aussie battler is behaving logically. With our terms of trade soaring (the price we get for what we export i.e. commodities) and the US dollar itself falling, it's little wonder that our dollar has been rallying.

On the other, there's an argument that it's probably pushing a little too high and will eventually calm down again. Partly, that's just the nature of markets - they build up momentum and run far on both the up and down sides. But the broad measure of relative purchasing power around the world also tends to indicate the Aussie is trading at a bit more than it's worth.

And having said that, it's quite possible for a currency to remain overvalued for years before retreating. As I've already said, no-one knows when the retreat will be, but it's a fairly safe bet that the day before iron ore prices top out and start retreating, the Aussie will have started falling.

The whole exchange rate business becomes more complicated by the fact that it's a multi-faceted game. We don't just compare our dollar against some fixed and constant value - we're forever comparing it against every other floating currency which in turn are also being traded against every other currency.

All exchange rates are in flux because of the US dollar's on-going weakness. And a fair whack of the rally in nominal commodity prices is because of the US dollar falling - gold, oil, wheat etc haven't risen in Australian dollar terms nearly as much as they have in greenbacks.

Which brings me back to last week's column on the gyrating oil price. What a week it was and is for oil - down, up to new highs and then last night suffering it's sharpest single-session fall in 17 years. I keep getting the feeling there are a bunch of traders who have set their hearts of seeing oil at US$150 a barrel, but plenty of others who think it's due for a retreat.