Counterintuitive

From the ABC:

The Australian dollar is trading near Friday's closing price of 61.7 US cents this morning after suffering its biggest sell-off since it was floated in 1983 over the weekend.

On Friday the currency hit a five-year low against the greenback of just over 60.5 US cents.

CommSec analyst Juliana Roadley says the dollar could fall below 60 US cents.

"Here at CBA we are looking that it might move below 60 but moving into the new year, we feel it will stabilise around these levels at the moment," she said.

"There is a lot more water to go under the bridge before we possibly see stability coming back into the markets.

Ms Roadley says the dollar is being sold off as investors turn to stronger currencies.

The last time the Australian currency was this cheap was during the tech boom years of the late 1990s. International investors threw money into the Dow Jones and the Nasdaq because of America's healthy economy.

Now America's economy is anything but healthy - yet here we are with investors throwing money at the US Dollar. What gives?

The problem at the moment continues to be volatility. As this economic crisis has spread from the US to all developed countries and then to emerging economies, a set of dominoes is falling. Because a lot of these economies are smaller entities, investors are pulling out in fear and putting their money into something they can feel safe with for the moment - which is the US Dollar.

But I don't think that this is a long term thing. The amazing and unprecedented rise in the US Dollar is not an expression of the strength of the US Economy. Instead, it is simply what people are throwing their money into until things begin to calm down.

Moreover, the medium term chance of capital flight and a crashing US Dollar continues to be an increasing risk. The Yen and the Euro (despite the latter's devaluation) will be the beneficiaries of this process.

Remember - this crisis started in the US and resulted from poor US policies and US market failures. That such actions would eventually lead to a rush to BUY the Dollar was certainly not foreseen by me - but I still maintain that a drop in the US Dollar is a much more likely outcome than for its price to remain as is.

In terms of specific predictions, the US Dollar is very unlikely to go beyond 70 on the US Dollar Index once the crash occurs.