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How High Can the Aussie Dollar Fly?

AP

The Australian dollar has been on a tear, and many investors and strategist are still bullish - but a few experts are sounding cautionary notes.

How about that Aussie dollar?

Since plummeting in the wake of the Japanese earthquake, the Australian currency has rocketed to new highs, and is regularly hitting record post-float levels against its U.S. counterpart.

There are plenty of great reasons for investors to be bullish on the Aussie. To begin with, there is no other industrialized country with such a high benchmark interest rate (4.75%), so there are plenty of opportunities to sell lower-yielding currencies and go long Australia. Also, rising commodity prices can only help an economy like Australia's. And while almost no one expects the Royal Bank of Australia to raise interest rates tomorrow, expectations are widespread that benchmark rates will go higher before the end of the year.

"Last month's RBA statement was very dovish,"' wrote analyst at Bank of America Merrill Lynch Global Research. "Higher retail sales and inflation data last week favors stronger language rather than weaker ones against inflation expectation."

But it wouldn't be a market without different opinions, and naysayers on the Aussie dollar offer up good reasons to trade it with care. For example, Malcolm Wood, head of investment strategy at Morgan Stanley Smith Barney, actually expects the Royal Bank of Australia to cut interest rates this year due to weakness in the non-mining part of the economy. And of course, the rising Australian dollar itself could put a damper on economic growth as well.

The bottom line: there is plenty to drive the Australian dollar even higher, but if you do dive in, be prepared to move fast if sentiment changes.

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