Since Paul Keating floated the Australian dollar 30 years ago, the average value against the US dollar has been in the mid to late US70 cent range.
That’s a big range for such a small economy. In fact, the Aussie dollar is one of the most traded currencies in the world.
A high Australian dollar means cheaper imports and overseas travel but less competitive exports. So, it’s a two-edged sword.
It is incredibly hard to make a prediction on the currency but you can get an idea of the future trend by understanding the main drivers of the dollar. They are:
US dollar
‘The Aussie’ (dollar) is compared most often against the US dollar – which is regarded as the world’s trading currency. The greenback is usually the common payment currency in trade between different countries.
So, if the US dollar goes up in value, the Aussie will fall in value by comparison even though nothing economic or financial may have happened.
So keep a watch on the US economy because if it continues to improve, their currency will continue to appreciate and ours will fall back.
Safe haven
In a world where Europe is in recession and its sovereign debt problems are far from resolved, China’s growth has slowed, Japan is insipid and the US economy is slowing, investors are understandably nervous.
Put yourself in the place of a big German or Brazilian pension (superannuation) fund manager trying to look for a safe place to invest client money and get a reasonable return.
Australia is a country with a Triple A rating from all three major credit agencies, has stable political and legal systems while sitting on the edge of the Asian economic miracle. When the rest of the world looks dodgy, Australia has become a safe haven for major overseas investors.
As all this investment money pours in, our dollar gets pushed up. That will continue as long as the economy stays solid and we maintain that all-important credit rating.
Interest rates
While those big overseas investors want a safe haven for their money, they also want to maximise returns. We’re offering amongst the highest interest rates in the world when compared to Europe, Japan and the US where rates are lower.
While that interest rate differential stays, we’ll keep attracting money.
But keep an eye on central banks around the world. If the US Federal Reserve, the European Central Bank, Bank of Japan or the Bank England decide to cut their interest rates further as their economies weaken, those overseas investors could shift their cash elsewhere which would put downward pressure on their currencies.
The same could happen if the Reserve Bank starts to cut our interest rates substantially.
Commodity prices
Australia is a trading nation. While the US economy is driven by the American consumer, Australia grows on the back of our exports.
Our biggest exports are minerals and our biggest customer is China, which buys a third of those exports. For right or wrong, the world sees us as a giant quarry and farm fuelling the developing economies of Asia and Japan.
So the value of our dollar is linked to commodity prices such as coal, iron ore, gold, wheat and beef. If those prices go up then the Aussie gets stronger and likewise, it gets weaker if those prices go down.
