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Is the Australian Dollar (A$) too high?

The Australian dollar (A$) (AUDUSD) has rallied above 80 US cents as the Australian economy rebounds.

What lower dollar?

For years, Australia’s central bank, the RBA, had been hooting and hollerin’ about the need for a lower AUD to stimulate the economy. Our exporters, many of them focused on resources, were coming to grips with slowing Chinese infrastructure growth and lower commodity prices.

Job cuts and slumping house prices in Western Australia and Queensland followed.

The RBA cut the official interest rate to 1.5% — a record low — which boosted the perceived wealth of Sydney siders and Melbournians.

Now, as house prices slow and commodity prices return, the RBA has changed its tune.

A recent report out of the RBA suggests that the official interest rate should be 3.5% – an entire 2% higher.

Together with Trump’s cover-ups, Twitter tirades and a general malaise in US stock markets, the news of potentially higher interest rates locally have boosted the Aussie currency.

Earlier this week, the AUD traded over 80 US cents for the first time in more than two years.

Is it time to sell Australian dollars?

I must admit, the higher AUD caught me by surprise. Three months ago I would have said it is more likely that it will have a ‘6’ in front of it than an ‘8’. Typical.

However, I — and the market for interest rates — continue to believe higher interest rates are still some way off. Just imagine if they increased interest rates 2% this year and what it would do to homeowners.

Another reason I think meaningful interest rate increases are some way off, poor wages growth. While power bills, fuel and the cost of living is on the up – wages are not growing as fast as we’ve known in the past.  

Sure, a 0.25% increase in interest rates might only increase your monthly repayments $100. But it has to come from somewhere.

Foolish Takeaway

Without interest rate increases I think it will be hard to see the AUD staying above 80 US cents for the medium term. Of course, no-one knows for certain where the Aussie dollar will be in a day, week or month from now. But if you don’t already have more than 30% of your share portfolio invested overseas it may be time to consider selling some Aussie dollars.

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Motley Fool Contributor Owen Raszkiewicz owns Twitter shares. You can follow him on Twitter @OwenRask.

Motley Fool contributor Owen Raszkiewicz has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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