Since the Australian dollar was floated in 1983 we have been eagerly comparing ourselves to other nations and their economies. In 2010 the Australian dollar was for the first time on par with the US dollar, showing the remarkable strength of the Australian economy. However, how strong is the Australian dollar really, since it is being compared to the US dollar is at historic lows?
The Australian Dollar Compared to the US Dollar
At the same time that the Australian dollar was reaching new heights, October 2010 has seen the US dollar drop to a 15 year low against the Japanese yen, and remain low against the euro. The US dollar is less than equal value compared to a number of other currencies, which has the potential to cause problems for the US economy, unless they can turn this weakness into an opportunity.
When the dollar of your country is weak, it does not buy as much in other countries, which means that if you travelled from the US to Japan or Europe, you would have to pay more for your purchases because your money is not worth as much. However, the US can turn this weakness to their advantage because when the dollar is weak, exports to other countries are cheaper, shrinking the trade deficit. This makes US manufacturers more popular because other countries are able to get much more for their money. Plus, the tourism industry can benefit because visitors coming into the US can buy more when they exchange their money.
At the same time, US imports are costing more because of the exchange rate, and because foreign companies have raised their prices so they do not lose money against a weaker US dollar. Plus, where tourists are attracted to the US because of the discounted prices thanks to the exchange rate, it makes it more expensive for Americans to travel overseas.
The US dollar is the benchmark for many countries so are the benefits for US tourism and exports enough to outweigh the downfalls of a weak American dollar. If the US were to try and strengthen their dollar they could do so by imposing more taxes on exports, or raising the interest rates on US Treasury bonds for foreign investors. However, this would result in higher interest rates on personal, home and business loans.
As a result it is often best to let the dollar correct itself, and with the US taking longer to recover from the effects of the Global Financial Crisis, the Australian dollar could maintain its strength for some time to come.
The Australian Dollar
Those new heights for the Australian dollar was a record breaking level of $US1.0004 thanks to rising interest rates in Australia and a weak American dollar. The October 2010 peak was a 20% increase from June of the same year and while the Australian dollar dropped back to US98.84 just a day later the Australian currency is likely to continue trading above parity in the coming years.
With such a fast rise, the Australia dollar is likely to suffer a correction in value, but even still is expected to remain above parity on average for the next few years. This is thanks to strong commodity prices and a strong Australian economy and unless the global economy collapses again, this strength is likely to continue at around $US1.10.
A strong Australian dollar is able to restrict the amount which interest rates will need to rise and even though it can put pressure on trade exposed companies, should be seen as a positive step for the Australian economy. The Australian dollar was able to close the gap to parity with the US dollar when the US Federal Reserve revealed their plans to boost the economic growth in the US to bring down their unemployment rate, as inflation in the US was running below the Federal Reserve’s goal of 2%.
The strength of the Australian dollar is due to what many financial analysts call our two speed economy. The strength of the dollar comes from it being the world’s fifths most traded currency as this attracts interest from buyers such as central banks looking to diversify their reserves outside of the US dollar. The rise of interest rates in Australia is also a stark contrast to many other developed economies, and this draws in more funds. Australia is also enjoying a mining boom thanks to China’s involvement and there is expected to be another year of growth in this area, with the potential for more into the future.
However, Prime Minister Julia Gillard has cautioned having a ‘patchwork economy’ where the performance of the mining sector shadows the Australian manufacturing and service sectors. A strong Australian dollar could also hamper the government’s plans to for a budget surplus by 2012-13. The Australian Government also acknowledge the benefits of the Australian dollar being on par with the US, as a floating currency has the ability to absorb some of the worst effects from global events.
A strong Australian dollar does make it harder for sectors such as manufacturing and tourism and just as American exports are snapped up, global demand for Australian products continues to be weak. Only China is showing strong support for buying Australian made.
The Strength of the Australian Dollar
Since the strength of a country’s currency is a good indicator of the health of their economy, the strong Australian dollar should be cause for celebration. However, a strong dollar is not always all good news and in Australia, the bad news comes in the form of the trade deficit, and a high level of household debt.
While countries once strived for a strong currency, it was a celebration because a strong currency did mean a strong economy. However, in the modern global financial sector, a strong currency can often mean a weak economy and many countries therefore now aim for a weak currency. The Australian dollar achieving parity with the US can mean it is actually overvalued, as it is being compared with a very weak US dollar.
Despite comparisons to the US, the Australian dollar still comes out as the currency of choice amongst many of the Group of 10 countries such as Britain, and some of the richest countries in Europe and Asia.
Alban is a personal finance writer at Home Loan Finder, which offer free information on reverse mortgage.