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Dollar headed back towards parity?

For the first time in over three months, the Australian dollar has climbed back above the US95c mark following caution issued by the US Federal Reserve on Wednesday.

The Fed’s decision to delay tapering its stimulus measures — citing decreased growth forecasts for this year and next as well as poor conditions in the job market — provided a boost for global risk sentiment and also put negative pressure on the US greenback. This saw the Australian dollar climb from 93.58c on Wednesday to a high of US95.15c on Thursday.

Tony Darvall, currency dealer at Easy Forex, suggested that people who had been shorting the currency over the last few months had also been getting out of their positions, which further bolstered the Aussie’s strength. He said “It’s sharply higher and it’s not likely to pull back either in the short term.”

Whilst some expect the dollar to hit US96.5 in the coming days, the Reserve Bank of Australia (RBA) will be feeling the heat to further reduce interest rates in either October or November. The high currency rate has been one of the key focuses as the RBA has cut interest rates to the current level of 2.5%, and it has hinted that further cuts could be necessary if it did not continue to fall.

At its current level of US94.95c, the dollar has climbed 6.2% since the beginning of the month when it was valued at just above US89c.

Foolish takeaway

The appreciating currency is also a major problem for exporters or companies heavily exposed to the US market. For instance, QBE Insurance (ASX: QBE) fell 1.4% on the news on Thursday, whilst miners such as BHP Billiton (ASX: BHP), Arrium (ASX: ARI) and Fortescue Metals Group (ASX: FMG) could also feel the pinch as their products become more expensive to overseas customers.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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