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Dollar currently undervalued: bank

The Australian dollar is trading at a 4.3 per cent discount in relation to the US dollar, according to Westpac.

Westpac believes that Y2K concerns are affecting commodities and the AUD/USD differently by temporarily boosting commodity demand and prices and, at the same time, creating a preference for core markets such as the US over peripheral markets such as Australia.

The more substantial the concerns about Y2K, the larger the undervaluation gap.

Westpac feels it is possible the RBA will increase interest rates in October or Novem-ber following a likely increase in US rates in early October.

Concerns about supply disruptions for commodities as a result of Y2K will cause precautionary stockbuilding ahead of year-end and place upward pressure on prices. The demand for commodities is currently outstripping increases in world industrial production which Westpac believes indicates a Y2K-induced increase in inventory stocks.

As a result, some analysts believe the strength in commodity prices may not continue provided Y2K has a minimal impact on the supply chain.

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