/www.bloomberg.com/
By Mark Tannenbaum
Sydney, Aug. 23 (Bloomberg) -- The Australian dollar is a gauge of prospects for the world economy, many investors say. Right now, it's pointing higher.
The currency has rebounded 3.5 percent from a four-month low touched earlier this month, propelled by rising world stock markets and expectations the U.S. won't fall back into recession, dragging other economies with it, investors said. It's the third- best performer of the 16 biggest world currencies that Bloomberg data ranks against the dollar during the past month.
A fifth of Australia's economy comes from exports, chiefly commodities such as aluminum and iron ore that are likely to see increased demand as manufacturers raise output.
``Companies will begin to boost production in expectation of recovery, and this benefits countries that export commodities,'' such as Australia, said Paresh Upadhyaya, a currency analyst at Putnam Investments in Boston, with $313 billion in assets. Putnam bought Australian dollars last month, he said.
The currency may climb to 58 cents by year end, from 54.07 cents today, reaching a 21-month high set in June, he said.
The Australian dollar is the 10th-strongest major currency this year, rising 6 percent against the U.S. dollar. Norway's krone has done the best with a 17 percent gain, helped by the surging price of oil, its biggest export. The New Zealand dollar, with about 30 percent of its economy from exports, is second, up 12 percent.
Commodities Recover
In a sign of rising demand for commodities, the Journal of Commerce Industrial Price Commodity Index, which consists of 18 industrial materials and is a leading indicator of economic growth, has gained seven of the last eight days, after last week reaching a two-month low.
Australia's currency has traded in the same direction as this index on more than eight of every 10 days this year, up from seven of ten over the two previous years. The currency's biggest rally of the 1990's, a 14 percent surge in 1994, coincided with the index's largest gain of the past two decades.
Upadhyaya said he bought Australian dollars as U.S. stocks rebounded in late July, in a sign investors were more confident in the outlook for growth in the world's biggest economy, Australia's second-largest export market.
The Standard & Poor's 500 Index has recovered 24 percent since reaching the lowest in more than five years on July 24.
``The Australian economy is a bellwether'' for the world economy because of demand for its commodity products, said Tony Norris, director of research in London at Evergreen International Advisors LLC, which oversees $7.5 billion.
Asian Exports
Evergreen holds more Australian dollars than recommended by the benchmarks it follows. The country will benefit from increasing appetite for its goods, particularly from Asia, Norris said.
Asian countries are the top buyers of Australia's five biggest exports -- coal, crude petroleum products, gold, iron ore and aluminum -- which comprised 27 percent of exports last year.
South Korea, India and China are among the largest buyers of Australia's exports. Rising exports are fueling the economies of South Korea and China and tax breaks helped India's expansion.
The Australian dollar has moved up and down as the economies around the world expanded and contracted. The currency sank 4.4 percent in June and July as slumping global stock markets sparked worries economic recoveries were further off than originally thought. The decline followed a four-month surge that began in late January as traders bet the country's central bank would raise interest rates to control inflation.
Six-Month Forecast
Demand for Australian exports may be limited as economies outside Asia expand more slowly, said Paul Lambert, managing director of currencies and fixed income at Deutsche Asset Management in London, which oversees about $70 billion in currencies.
The Australian dollar will take six months to reach 57 cents, benefiting from an overall decline in the U.S. dollar, he said. Lambert is ``a little bit concerned over the global growth outlook,'' because U.S. growth will disappoint investors for the next five years, coming in below the consensus forecast of 3.5 percent, he said.
The U.S. economy slowed to a 1.1 percent annual rate of growth in the second quarter, from 5 percent in the first, and retail, financial, construction, and other non-manufacturing enterprises, which represent two-thirds of the U.S. economy, grew at a slower pace in July as well, an industry report showed.
Higher Rates
Reserve Bank of Australia Governor Ian Macfarlane indicated in a speech Wednesday the bank may increase its benchmark rate for overnight loans between banks, now at 4.75 percent, to between 5.5 percent and 6 percent, even though he has ``serious doubts'' about global growth.
The RBA boosted rates a quarter-point in both May and June.
The Federal Reserve won't start raising rates until 2003, most economists say.
As long as the U.S. rebound doesn't falter, the RBA will lean toward further rate increases, supporting the Australian dollar, said Anthony Borthwick, senior currency manager at Panagora Asset Management in Boston, with assets of $15 billion.
Panagora boosted Australian dollar holdings a month ago on ``rate differentials and growth expectations,'' said Borthwick, who expects the currency to strengthen to 58 cents by year-end.
Australia's economy grew 4.2 percent from a year earlier in the first quarter and probably expanded at close to a 4 percent rate in the second, according to a Bloomberg News survey.