ASX 200 set to climb, but dollar remains unclear

The outlook for the Australian dollar remains extremely unclear with economists divided as to where it will stand by mid-2014. In fact, the gap between the highest and lowest estimate is the widest of forecasts between 16 global currencies.

With the dollar currently sitting at US93.76c, some economists predict that it will climb towards parity with the US greenback by mid-next year whilst others believe it will fall to around US80c. These variations are largely based around perspectives of how a Chinese recovery would affect the local economy whilst doubt also lingers over the US Federal Reserve’s stimulus program.

The high Australian dollar has proven painful for exporters and other companies which heavily rely upon foreign markets for revenue, which have all been awaiting relief. Miners such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) or Fortescue Metals Group (ASX: FMG) would certainly benefit from a lower Australian dollar, as would companies including Cochlear (ASX: COH) or Coca-Cola Amatil (ASX: CCL).

The strength of the dollar has also been a major concern for the Reserve Bank of Australia (RBA), which has remained hesitant to lower interest rates to apply downwards pressure on the dollar due to the risk of sparking a housing price bubble. Many analysts have suggested a rate cut could be in line early next year if the dollar does not begin to fall.

In the meantime, however, AMP chief economist Shane Oliver has stated that the dollar would be “buffeted” in the short-term whilst in the medium term the trend was likely to be downwards. Oliver also warned that investors in the stock market should be prepared for a potential correction in prices following a strong rally in recent months, although he remains optimistic that the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) could break through the 5500-point threshold by the end of the year.

Foolish takeaway

The benchmark index is currently residing near a five-year high at just above 5400 points, and many stocks have become overpriced. However, there are still opportunities available!

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

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