MARKETS: DOLLAR DIRECTION DILEMMA

Markets: Dollar direction dilemma

Credit Suisse's global head of foreign exchange, commodities and Asian strategy, the London-based Ric Deverell thinks a fall in the Australian dollar to 75 US cents spells good news for the local economy. But the stock market may not like such a sharp deterioration in the value of the local currency. It would mean a 17 per cent fall from 90.68 US cents as of 0855 AEST, according to Bloomberg data.

As Deverell's Sydney-based colleague Damien Boey says, the Australian dollar is a proxy for global growth. If the Australian dollar slumps along the lines of Deverell's forecast, global growth, particularly in China, will retreat dramatically along with commodity prices. That may perhaps accelerate a fall in the Australian dollar beyond the Deverell forecast. Foreign investors may pull even more money for an economy they see as highly leveraged to commodity markets as the value of their Australian assets plummet.

Deverell is sanguine about such a scenario. He says a fall in the Australian dollar is just what is needed for the non-mining sector of the economy. But since April 11 when the Australian dollar was trading at $US1.0545, the stock market has dropped 3.3 per cent. In the meantime US bond yields have risen, not a helpful factor for any equity market. In London on Friday, trading BHP and Rio Tinto shares fell by 3.6 per cent and 4.4 per cent respectively despite the Tianjin iron ore spot price rising a seventh consecutive day to $US122.60 a tonne.

If the stock market is to show sustained gains it may need the Australian dollar to reverse course. The local currency will only do that if commodity prices rise. This may prompt foreign investors to return to buying Australian dollar assets in the belief the global economy is recovering. In the end a rising Australian dollar may mean there is more confidence in the local economy and the stock market rather than a falling currency that creates more uncertainty and nervousness among investors.