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Fainting lady a welcome respite

THE Australian dollar batted her eyelashes and flirted with the greenback at US56 cents last week. But the excitement was too much, and the little lady fainted.

The temporary respite is welcome. The Aussie was going up so fast that exporters were caught short and had to stampede to buy cover. Fund managers with too much invested unhedged in overseas markets have bitten their fingernails to the quick. Forecasting currency movements is a mug’s game. The US47.5 cents the Australian dollar touched last April was a ridiculous level. The accelerating recovery is a mixed blessing. Exporters are disadvantaged, but imports get cheaper, which will enable some companies to rebuild profit margins.

The shares of companies with a high proportion of overseas earnings have been hammered. Westfield Holdings, CSL and Brambles were sold down, along with MIM, BHP-Billiton and Rio Tinto. The lemmings have scuttled into the banking sector and other perceived havens like TAB, Tabcorp and Lion Nathan. Only weeks ago, savants were telling us to dump boring old defensive stocks. Now they cannot get enough of them. Of course, that will change again.

The precipitate decline in the US dollar has stood the financial world on its head. Weakness turned into a rout with the news that the US budget surplus, which stood at $US165 billion this time last year, has been turned into a deficit of $US66.5 billion. That comes on top of a billion dollars a day current account black hole. Government expenditure on transport, health and welfare payments has ballooned, and post September 11 spending on defence is already up $23 billion. The recession last year is coming home to roost in the shape of a big drop in corporate and personal tax collection. Revenue will be flat again in the coming year because of tax cuts.

Global investors, who had hung grimly to the greenback through thick and thin, largely because there were few alternatives, are now reluctant to finance this profligate lifestyle. Last month we quoted our friend, Hong Kong-based economist Marc Faber, predicting a “migration out of US paper financial assets into commodities such as oil, food and precious metals.”

There has been a 20-year bull market in US stocks and bonds, and an equally long bear market in commodities. Are we seeing a big turn at last?

Certainly investors are voting with their feet. Capital is flowing quickly out of Manhattan seeking better returns. It has been going into Asian markets, including Tokyo, into Swiss francs, high yielding currencies like the South African rand and the Australian dollar – and precious metals.

The spike in the gold price to $US322 has lit a fire under the share prices in our gold industry, which sadly is becoming increasingly foreign controlled by the day. The men from Johannesburg are doing high-fives. The ASX/S&P Gold Index has climbed over 30 per cent this year – although the surge in the currency means the local gold price is not up much at $A580. JP Morgan believes the near term top for gold is $US330 an ounce. The investment bankers say speculators are long 4.4 million ounces on the Comex futures market, the heaviest bull position for years.

The sliding greenback is by no means all bad news. US exporters of manufactured goods, badly hurt by the overvalued currency, will be more competitive.

The change of direction will eventually help reflate economies in China, Hong Kong and Japan. More US dollar-denominated portfolio money might come into Australia seeking the trifecta of diversification, decent stock market returns and windfall currency gains. Commodity prices are likely to gain ground sooner rather than later.

The US domestic economy is sending out conflicting signals. First quarter GDP expanded a less than expected 5.6 per cent. However, factory orders for big-ticket item like cars and refrigerators rose a surprising 1.1 per cent in April. Best guesses suggest a slow economic recovery for the rest of the year. But that may not be reflected in equity prices.

It might pay for Australian investors to refrain from letting Wall Street lead them by the nose. The US market is still suffering from ‘Enronitis’, with every scrap of corporate news being held up to the light for flaws.

Share prices remain overextended by most yardsticks, and repeated warnings of more terrorist attacks on American soil have rubbed nerves raw.

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