I have written many posts over the years on the difficulties in forecasting exchange rates. An example I often give in class is a quote by our then chief scientist in 2002 saying that the AUD was doomed to fall to US30c because of our overreliance on natural resources. Oops. But as recently as 2009 we had the view that the USD was a safe haven as the AUD fell briefly below 60c. As I say in my classes, fads, sentiment and a lot of other noise drives huge short term volatility in exchange rates. At US$1.10 the AUD is overvalued. However, what happens over the next few months, who knows. When the US defaults next week it is quite possible that the AUD will rise significantly. There are a number of reasons for the historical strength of the USD. Settlement of many trade contracts – oil for example – are done in USD. The majority of trade in Asia is still priced and often settled in USD. It is impossible to know how much extra value this generates for the USD, but it does raise its value. A default would certainly see a more rapid move away from the USD as a means of trade settlement, further devaluing the USD. It is quite possible that the AUD might rise 5-10c in the coming weeks. But sooner or later (maybe later) the US economy will recover, US interest rates will rise, and the AUD will fall back to a more normal level (below parity). Going against this view was a headline in the Age saying the AUD was heading for US$1.50, and this one saying that the AUD is headed for US$1.70 by 2014. If anyone can get me Savas Savouri’s email address I will happily bet $10,000 that the AUD will not get to US$1.70 by 2014 – the loser to donate that amount to a charity of the other’s choice. Would be good to see a hedge fund manager put some of their own money on the line for a change!