THE already overvalued Australian dollar will reach parity with the US dollar in the next six to 12 months and peak at about $US1.02-03, a currency strategist says.
State Street Global Advisers head of currency management Collin Crownover says the unit is already overvalued by about 20 per cent and that figure would stretch out to 30 per cent if it reaches the $US1.03 mark.
"I think we'll see about a 10 per cent appreciation from where we are now," the London-based Dr Crownover said in Sydney on Friday.
"At that point certain dynamics come into play and that becomes an extreme overvaluation.
"Even though Australia has a much better growth profile than the rest of the G10 right now, people at that level might take pause and say even though the growth is a lot better, that's pretty rich relevant to the valuations used for investments into Australia."
Asked whether he felt the Australian dollar would remain at parity for long he said: "Perhaps not."
"We do think it will reach parity within the next six to 12 months.
"Then the Australian dollar becomes 30 per cent overvalued and historically that's been a point at which we see significant imbalances and its much more likely to be corrected."
The strength of the local currency two years ago, when it traded as high as 98.5 US cents, was largely due to "speculative flows", while this time the flows into Australia were of a "more stable, long term variety," he said. The currency was trading around 91.64 US cents on Friday.
Dr Crownover said the US dollar would continue to be the main global reserve currency, despite talk of the emergence of the Chinese Renminbi.
He said the current weakness of the US dollar was part of a "cyclical decline".
"We think the US dollar's weakness is consistent with the relative economic growth in the US," he said.
"We don't see anything abnormal about the US dollar weakness currently at this phase of the business cycle."
He dismissed arguments that the world was seeing reserve diversification away from the US dollar, leading to the first stages of a US dollar decline.
"While I certainly think that could happen at some point, it hasn't happened yet," he said.
"There is no evidence that central bank reserves are being diversified away from US dollars."
US central bank reserves were now three times higher than they were at the start of the decade and US dollar reserves had remained roughly at two thirds of global reserves since the introduction of the euro in 2002.
He conceded it would be ideal to have a more diversified basket of reserve currencies, but said there was no other currency which had same level of credibility as the US dollar.
He argued the fixed Chinese Renminbi was not undervalued, adding that it would not become a reserve currency for about two decades.
Authorities in China would allow the Renminbi to appreciate by four to five per cent against the US dollar in the second half of 2010, he said.
"The reason we think that's not going to happen immediately is that China's economy is not as healthy as it might seem with the headline GDP (gross domestic product) numbers and the export sector is still very weak."
He said a failure to allow the Chinese currency to appreciate could lead to a "massive bubble" due to overinvestment.
