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Where to for the Aussie dollar?

Currently trading around $1.04 against the US dollar, economists and some experts have predicted it could rise dramatically. Others aren’t so sure, and have predicted a fall below parity.

Some media reports have suggested that it could head as high as $1.10 to $1.25, as the US muddles through its issues, neither resolving them nor getting into a deeper mess. But with official interest rates in Australia expected to stay around 3%, or even drop further, we could also see the Australian dollar return to parity against the greenback.

With interest rates in many developed economies sitting at around 0%, including Japan, the UK and the US, a 3% return makes Australia an attractive place to store funds. At the moment it seems Australia is one of the few places in the world with a AAA credit rating that overseas corporates and central banks are looking at. They may also face dire situations locally – hence the demand for our currency.

Other analysts have suggested that the currency will fall below parity, to around 98 US cents over the 2013 year, citing slowing corporate investment and a peak for mining investment in Australia, at the same time as Europe and the US recover from their economic issues.

For investors looking to take advantage of a fall in the Australian dollar exchange rate, investments in foreign shares, exchange traded funds (ETFs) and ASX listed companies with large offshore earnings appear to be the go. These include CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH), Resmed Inc (ASX: RMD), or James Hardie Industries (ASX: JHX), to name but a few.

Buying internationally now should give investors exposure to both rising share prices as foreign economies recover, as well as further upside from a falling Australian dollar. (A falling exchange rate means companies earn more in Australian dollars). Of course, the risk is that the dollar rises even further to $1.10 or higher, but that also gives Australian investors more purchasing power.

Foolish takeaway

When the Aussie dollar trades above parity with the US dollar, economists generally believe that it’s too high and should normally trade at a discount to the greenback. Whether it goes higher or lower is heavily dependent on the economic situation in the US, but investors should make the most of the current opportunity to invest offshore, cheaply.

If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King owns shares in CSL & Cochlear. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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