The Aussie dollar is running out of rocket fuel.

Before every crash the press points out that it has hit a high and then the thud when the price falls.

Aivars Lode

By ALEX FRANGOS
The Aussie dollar is running out of rocket fuel.
The remarkable rise of the Australian currency in the past year, pushing it up 32% against the U.S. dollar, had solid fundamentals. Australia's aggressive central bank kept interest rates on the upswing, attracting yield-starved investors from around the world. The commodity-hungry economies of China and India have been gobbling up Australian coal, iron ore and natural gas, sparking a capital expenditure boom and lots of jobs for Australians. Add a generally feeble greenback and rising commodity prices, and an Aussie dollar piercing all-time highs made sense.
Yet those factors are falling away, leaving the Aussie dollar like cartoon character Wile E. Coyote, legs still churning, as it hangs temporarily suspended over a nasty drop. Growth in both China and India is moderating, and could be forced to slow seriously if inflation can't be tamed. Commodity prices seem to have peaked for now. Oil is down nearly 13% since its early May high, and coal and iron ore are off their tops. But the Australian dollar is only 3% lower than its post 1983-float high, achieved April 29. The Reserve Bank held pat on rates Tuesday and signaled it is less concerned about medium-term inflation risks. With interest rates already biting into home prices and consumer credit, some think the Reserve Bank is done with its tightening.
‪There are counterarguments. Bulls say demand from central banks diversifying reserves puts a floor under the Australian dollar. But central banks move slowly, and diversification into the Australian dollar likely hasn't happened quickly enough over the past 12 months to make a serious difference. It was exactly a year ago, during Act I of the Greek debt drama, that the Australian dollar fell more than 10% in 10 days, hitting $0.81 on June 7, 2010.
‪The other pro-Aussie story is that if China really begins to slow, Communist Party leaders will turn on the infrastructure taps once again.That might be true, but it will be tough to repeat anything like the scale of stimulus enacted during the financial crisis. In the interim, currencies linked to Chinese demand, especially the Aussie, are at risk of a correction. Other currencies to watch out for include the Malaysian ringgit, Indonesian rupiah and Korean won, all at elevated levels themselves.
Credit Suisse says the Aussie is 7% overvalued against the greenback, according to its currency models, which take into account two factors that often drive the Australian dollar's level, commodity prices and interest rates. But if the China support cracks, it is likely to fall a lot further than that.
Write to Alex Frangos at alex.frangos@wsj.com