The rise and fall of the Australian Dollar

Economics of Contentment Part 04 – First published on the Sydney Opera House Ideas website.

Did you notice that you were suddenly paying more all that once-cheap international online shopping? In the fourth installment of his column ‘The Economics of Contentment,’ John Treadgold looks at the fate of the Australian dollar and finds some silver lining for all of us amateur importers.

We all know the Aussie dollar dropped to almost 90 US cents last week, but is this necessarily a bad thing?

The fluctuations of our currency are often watched like a football score: a rise is met with cheers of nationalistic fervor and a fall with anger and frustration. In fact, from an economic perspective, a falling Aussie dollar may not necessarily make us worse off.

For the past few years the Aussie dollar has been stronger than ever been before. It reached parity with the US dollar and then kept going, almost reaching $1.10. Why? Essentially, lots of foreigners wanted Aussie dollars and so the price was bid up and up; the Chinese were buying dollars in order to buy our coal and iron ore, Europeans were buying dollars as a store of value because their currencies were looking so shaky, and Japanese and Americans were buying the Aussie to earn interest on their funds because our interest rates were far higher than theirs.

The value of a currency is like a tug-of-war. A rising dollar will make foreign goods cheaper (eg. shoes on Amazon or overseas holidays or petrol). But an economy works both ways and this rise will also make it more expensive for foreigners to buy goods that Australia is selling (eg. University degrees, holidays to Uluru), which slows jobs growth and productivity at home.

So to some, last week’s dramatic depreciation of the dollar was a welcome change. Any industry that is exposed to competition from overseas will see their goods become cheaper to their foreign customers. But the flip side is that your trip to America just became more expensive.

It’s a balancing act and the question is what value of the dollar will offer the right combination of value in exports and imports to maximize prosperity. I raise this as a hypothetical because it’s a question with a lot of variables. We must look at it from an economy wide perspective since businesses and individuals will have their own preferred level for the dollar depending on their supply chain, customer base… and their holiday plans.

Broadly, last week showed us how fragile Australia has become to external factors. On Monday the Aussie bought 97 US cents, but by Thursday it had dropped to 92 US cents. This was a big and sudden drop, and the blame is being laid squarely on the comments of one man: Ben Bernanke.

Bernanke is the Chairmen of the US Federal Reserve Bank and when he merely suggested that the Fed would be slowing down their printing of money (it’s currently pumping $85 billion into the US economy every month) it was taken as a signal that their economy was on the mend. This resulted in the wholesale dumping of the Aussie in favour of the US dollar.

There are also signs that China’s demand for our minerals is cooling, putting further downward pressure on the Aussie dollar. The doomsayers suggest that it’s a sign of Australia’s economy faltering, but this is taking a very narrow view of Australia.

While there’s no doubt that the minerals boom has been a lucky break in a time of depression in the West, this boom had a detrimental effect on many export exposed industries through its pushing the dollar ever higher. With the pressure coming off the dollar, we should see a range of industries rising up to fill the gaps in growth left by the minerals industry coming off the boil.

Meanwhile, those businesses that were able to weather the storm of a high dollar and of high interest rates will now be lean and agile and ready to make the most of a more competitive market place.

There’s also an interest rate impact of a currency shift and this was seen last month when Australian interest rates were dropped to historically low levels. The drop in the cash rate by the Reserve Bank was said to have been necessary to stem the pain caused by the high dollar. This most recent revaluing of the dollar will mean that interest rates should stay steady for the near future.

Interest rates and currency are inextricably linked. Bernanke’s comments in the US have led to assumptions that US interest rates will rise due to less government spending, this is re-igniting people’s appetites for holding the “greenback.”

Currency levels are clearly a sign of economic health; I’m not trying to deny that. But in Australia, over the past 3-4 years, the dollar has been so high it has been strangling a whole range of industries. At 95 US cents the Aussie dollar is still 20c above the long-term average of 75cents and double its record lowof 47 US cents in 2001.

This recent shock to the system has returned a sense of balance. Imports will be more expensive, it’s true, but if we support locally made products and if we can find a little optimism about our economy, then the boost will be felt by everybody.