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Evan Schwarten
May 22, 2012 - 2:19PMRead later
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AAP

The Australian dollar is drastically overpriced and will soon be back below 90 US cents before tumbling even further.

That's the blunt view of leading European economist Steen Jakobsen.

"The Australian dollar, as far as I'm concerned, is the most overvalued currency relative to its outlook, even worse than the Euro," the global chief economist of Denmark's Saxo Bank told AAP.

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"It's up 70 per cent since the Lehman Brothers crisis and it needs to come down."

Investment giant Lehman Brothers collapsed in September 2008, sending global stock markets into a panic and causing the Australian dollar to fall as low as 60 US cents.

In the short term, Mr Jakobsen forecasts the local currency falling below 90 US cents, with a drop to around 80 US cents likely in the longer term.

His view is in stark contrast to those expressed by most domestic currency traders.

Of the 13 currency experts surveyed by AAP last week, eight expected the Australian dollar to be trading back above 100 US cents at the end of 2012, while only one placed it below 90 cents.

The local currency last week dropped below parity with its US counterpart for the first time since December 2011 as concerns about Greece's political crisis dragged down global confidence.

The scenario Mr Jakobsen is contemplating that a worsening global condition and a slowdown in Chinese growth, along with weaker than expected domestic growth, will force the Reserve Bank of Australia (RBA) to cut interest rates sharply.

Australia has had significantly higher interest rates than the rest of the developed world in recent years, making it more attractive for foreign investors to move their money here and pushing up the Australian dollar.

Mr Jakobsen said the RBA could cut the cash rate to as low as 2.25 per cent from its current level of 3.75 per cent, which combined with weaker confidence across the globe, would deter foreign investors from parking their money here and push the Australian dollar lower.

"The path, which is lower than expected domestic growth, lower than expected Chinese growth, lower than expected Australian dollar, is the most likely path right now," he said.

At 1345 AEST on Tuesday, the local currency was trading at 98.97 US cents, up from 98.36 cents on Monday.
http://news.theage.com.au/breaking-news-business/a-to-fall-below-90-cents-economist-20120522-1z2ky.html