Euro could go the way of British pound in 1992

PREDICTING the direction of currencies is a mug's game.

PREDICTING the direction of currencies is a mug's game.

Still, if you have billions at your disposal it can be a very lucrative one -- as the world found out when George Soros famously took a billion-dollar bet against the British pound in September 1992 and won.

This year again will see billions won or lost on the direction of currencies.

Foreign exchange markets trade on an imperfect slew of data, second-guessing the direction sovereign states and central banks will take with monetary and fiscal policies.

And none is more imperfect than Europe.

What was once supposed to unite Europe is now dividing it. The fiscal disaster in Greece is something not readily contained thanks to the unifying characteristic of the euro, once a symbol of the strength of a newly united continent.

Just a few years ago the euro was bounding higher against the US dollar.

Now, even against a weakened greenback, the euro is falling as hedge funds and others lay quite sensible bets that more bad news is coming on the continent as the sovereign debt storm rolls on.

In Australia, it is a different story as our dollar soars. Now the guessing game is on as to just how high the Aussie will go.

For every piece of research confidently predicting the Australian dollar might soar to as high as $US1.70, you can find another view indicating that perhaps the currency is at its apogee.

And in the past few weeks there have been a number of indicators that the latter view may prevail -- buying your overseas currency now before your holiday could be a sensible move.

Australia's proxy position as a play on the Chinese economic growth story is a key driver of the local currency.

The dollar's strong performance -- up more than 30 per cent from lows in the past year against the greenback -- is partly explained by the commodities boom. But similar commodity-linked currencies such as the South African rand and the Canadian dollar have followed a different path.

In the none-too-subtle lingua franca of hedge funds, Australia is a big quarry servicing the China boom. The other adage is that the "trend is your friend", and the China boom story has been one hell of a trend. Not one to bet against.

But Beijing's efforts to cool inflation are already being reflected in the data, with this week's preliminary manufacturing figures indicating a slowdown.

The Australian dollar has come off its highs of $US1.10 earlier this month and was trading at $US1.0577 last night.

The mining boom might as well be an offshore economy, as businesses not connected to mining continue to suffer. Kerry Stokes said that it all felt like a "major downturn" in the Australian economy. Plenty of retailers would agree as consumers shut their wallets -- perhaps saving their dollars for one last holiday overseas while the going is good.