It is a brave, or foolish, prime minister who forecasts the movements of the Australian dollar.
Yesterday Julia Gillard said the currency would remain relatively strong for years to come because of its newfound ''safe haven'' status as a proxy for the Asian region. Problem, is the PM is wrong.
The Australian dollar is not a safe haven. In reality there's only one safe-haven currency and that's the US dollar. It's pretty much the world's reserve currency and that's why countries such as China peg their own units to the US dollar.
By calling the Australian dollar a ''safe haven'', the PM is inferring that parking money in the local unit is a safe option. But the dollar is one of the most volatile currencies.
That volatility was on display overnight, with the dollar rising to its highest in three months against the greenback, touching $US1.074 before easing back. The Aussie dollar also crept higher against the euro to fall just shy of its record 81.8 euro-cent level, reaching 81.5 euro cents at its overnight peak. Against the pound, it's trading at around 67.6 pence - within cooee of its three-decade high of 68.1 pence reached last month.
The dollar is the fifth-most traded currency, accounting for 7.6 per cent of turnover. (The US dollar, euro, Japanese yen and pound sterling take out the top places). And highly traded currencies invite speculators and they send currencies in unforeseeable directions quickly.
For example, during the second half of 2008, the Australian dollar depreciated by about 30 per cent, from about US95¢ to US65¢ against the greenback as investors ran for cover, buying up the US unit.
It bounced back but that didn't matter much to the investors who had lost their money, or shareholders who watched corporate earnings dive, or tourists who had to cancel their overseas holidays.
Another Gillard error is that she's made the comment when the currency is trading around 30-year highs. Against the trade-weighted index, which measures the dollar's value against Australia's trading partners, it is at its highest since 1985.
The PM sounds a bit like the estate agent who tells you the home you're about to buy, which has had a record run up in price, can only appreciate.
It's easy to see why she made the mistake (though it's not excusable). Australia is a relatively high-interest rate, low-net-debt, developed economy that investors find attractive. We are near China and the developing Asian economies and our currency tends to reflect commodity prices. But what if the Chinese economy slows appreciable, or commodity prices fall out of bed because Brazil and other economies manage to ship more coal or iron ore?
What happens if the US economy picks up? Watch the flood of money rush the greenback then.
And what if the speculators out there decide one of those cheaper global currencies offers better value than the Aussie? Forecasting the Australian dollar is a mug's game.
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