The Australian Bureau of Agricultural and Resource Economics says the outlook for the Australian dollar remains uncertain despite expectations the currency will remain at about US68 cents for 2004-2005.
ABARE’s uncertainty follows recent movements in exchange rates, which have been associated more with changes in financial market sentiment than economic fundamentals.
The forecaster said financial markets’ return of focus to the large US budget and account deficits could lead to a significant decline of the US dollar against currencies including the Aussie dollar.
Despite the uncertainty, the general outlook comes as welcome news to Western Australian exporters, who were severely affected by the significant appreciation of the Australian dollar against the US dollar last financial year.
The Aussie dollar hit six-and-half-year highs earlier this year when it broke through the US80 cent mark in February.
Abare said the appreciation in the local currency was due to three factors:
p the sharp weakening of the US dollar against freely floating international currencies, mainly as a result of large increases in the US current account and budget deficits;
p a significant improvement in the outlook for world economic growth, which increased the prospects for Australia’s terms of trade; and
p a widening in interest rate differentials between Australia and the major world economies.
