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More Pain for Australian Dollar; to Fall to $0.90: UBS

With Europe’s debt crisis keeping markets on tenterhooks, it’s not surprising that the Australian dollar – widely considered as a barometer of the health of the global economy – bore the brunt of investor panic in recent weeks.

Australian Notes - Mixed
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Australian Notes - Mixed

Having stayed above parity against the U.S. dollar for nearly six months, the Aussie currency (AUD) crashed back below par last week. UBS, who was one of the first banks to call for a return to parity for the currency, expects it to fall to $0.90 in the next three months.

"When we were at $1.10, we were calling for its parity," UBS Investment Bank's chief currency strategist Mansoor Mohi-uddin told CNBC on Thursday.

He cites the prospect of easing monetary policy and the overall risk aversion for his bearish views. The AUD is seen as a 'risk' currency because of its close correlation with the commodity markets and the currency’s high yield which attracts foreign inflows. And when the ‘risk’ trade unwinds, as seen in recent months, the currency takes a toll.

"Correlations between risk assets are high in the current environment...and downside pressure remains for AUD," Mohi-uddin said in a recent report.

“If the people who are buying all of Australian dollars the last couple of years, particularly Asian central banks, aren't getting inflows any more, they're likely to have to sell the Australian dollars to balance their reserves, we'll see that now,” he added.

Recent concerns over China’s economy, arguably the key engine behind the current economic growth, are also casting a pall over the AUD.

"Australia's definitely still a shadow currency for the Chinese economy, there's no doubt about that. But people are worried about slowing growth in China as the global economy slows,” Mohi-uddin said, referring to the recent tepid manufacturing data out of China. “So that's hurting the commodity story.”

As global growth slows, analysts are paring back expectations of further tightening by the Reserve Bank of Australia, which left its benchmark rate at 4.75 percent since November 2010, after a period of aggressive rate hikes.

“The markets worry about the RBA cutting interest rates now,” Mohi-uddin said, and notes that the U.S. dollar will continue to gain in the current environment.

"Investors are likely to keep seeking the safe-haven dollar as they flee riskier currencies, emerging markets and commodities," he said.