Aussie Dollar Risky, USD to Rally: UBS

NEW YORK (TheStreet) -- The Australian dollar has steadily challenged the U.S. dollar in the past year, encouraging views that the former has become a safe-haven currency.

The Australian dollar has soared 12.2% over its U.S. peer in the past year -- even more so than the euro, which has risen 5.3% in the past 12 months over the greenback as the European Central Bank leaves the door open for more interest rate hikes.

Still, UBS Head of Foreign Exchange Strategy & Precious Metals, Mansoor Mohi-uddin, cautioned this week that the Australian dollar hasn't become a safe-haven currency.

Mohi-uddin said the Australian dollar's almost three-decade high against the dollar is driven by three factors.

The first is it has a very high yield for a major currency. The Reserve Bank of Australia, the country's central bank, has an interest rate of 4.75%. "Many clients, particularly at Asia, want to hold the Australian dollar as a high-yielding asset," said Mohi-uddin.

"The second reason is simply positioning," the currency strategist explained. Many investors in the markets were expecting the Australian dollar to stop rising. When the earthquake hit Japan, the Australian dollar did fall. UBS clients sold on the currency's way down.

But the Australian dollar has since rallied again, forcing clients who were short the currency to cut their positions. "We call this the pain trade," said Mohi-uddin.

Mohi-uddin points out that the Australian dollar's drop at the height of the earthquake disaster in Japan and on Japan's recent elevation of radiation warning levels post-earthquake is an example of why it isn't a safe-haven currency.