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Will the Aussie dollar fall against the greenback?

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The Australian dollar has been holding steady around US75c, hitting an eight-month high of US76c on Monday.

Only last week, Saxo Bank's Steen Jakobsen suggested it was boom time for the Australian currency and was betting on the Australian dollar reaching parity with the USD but other analysts suggest it could go the other way.

Rallying on the back of the price of iron ore and then slipping on the back of an oil price slump, it's anybody's guess which way the Australian dollar will go.

aussie dollar greenback

Of course the other factor will be the outcome of the two-day US Federal Reserve meeting which is currently taking place.

So, will the rally continue or will we see the Australian dollar head south?

We ask prominent economists Craig James from CommSec, Shane Oliver from AMP and Chris Weston from IG for their forecasts.

Craig James, chief economist, CommSec

The Aussie dollar has posted solid gains over the past seven weeks, lifting around US7 cents or around 10%.

Still, it has hardly lifted in isolation with the iron ore price gaining 38% over the same period, oil rising by more than 30% and gold lifting by around 15%.

But while sentiment on the global economy has seemingly shifted from gloom to boom, there are headwinds preventing the Aussie dollar from rising further.

Commodity markets are still characterised by over-supplied conditions; US rates are poised to rise over 2016, underpinning the greenback; and China, Europe and Japan all face challenges in lifting economic growth.

In addition the Reserve Bank will likely return to jawboning the currency lower if the strengthening trend persists.

We are more inclined to think that the Aussie dollar will settle in the low 70s against the greenback over 2016.

Shane Oliver, head of investment Strategy and chief economist, AMP Capital Investors

From its low in January the Australian dollar has had a bounce of around 10% thanks to a less hawkish Fed, a rebound in commodities and shares, some positive economic data in Australia and an unwinding of speculative short positions.

The Aussie dollar could still go a bit higher in the short term however, just as we saw with the 9% bounce in the $A in early 2014, any further short term strength is unlikely to go too far.

The broad downtrend is likely to resume as the interest rate differential in favour of Australia narrows as the RBA eventually cuts the cash rate again or at least resorts to jawboning the $A lower and the Fed eventually resumes hiking, commodity prices remain weak and the $A undertakes its usual undershoot of fair value.

Over the next 12 months I expect it to head towards $US0.60.

Chris Weston, chief market strategist, IG

The recent strength in the AUD has certainly surprised in 2016, but the upside from here should be tougher going with the RBA likely to become more active in its disdain for recent strength.

The direction of the AUD really depends on asset price volatility and whether oil, iron ore and base metals can hold their recent rally. If these inputs hold then "fair value" is close to current levels, but that is a big if and a pick-up in volatility would see the AUD under pressure.

Looking at rate expectations, swaps are pricing in around one rate cut this calendar year from the RBA, while the odds of a Fed hike in the June meeting are 50%.

Given I see the RBA on hold this year and the Fed hiking in June, the AUD/USD at $0.7500 seems fair. However, the risks are to the downside, but I don't currently envisage a collapse.

My base case is AUD/USD trades in a range of 70c to 76c for the remainder of the year.

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