Tags: DollarMortgage Insurance | 18.10.10

Australian Dollar Matches the US Dollar

At 8:17am, New York time, Friday October 15th 2010, the Australian Dollar reached US $1.0003 – it's highest since 1983. The Aussie has received a 20% gain since June due to high local interest rates and the weak US dollar. Equal value was obtained when the US Federal Reserve Chairman Ben Bernanke discussed further federal plans to boost economic growth if it becomes necessary. His comments pushed the US dollar further down against the major rivals, including the Australian dollar.

The scene

The New Zealand dollar is not far behind, and is currently buying more than 76 US cents per dollar.

The Aussie is the fifth most-traded currency in the world, and as such, attracts buying interest from banks looking to diversify outside of the US dollar. Australia is benefiting from a recent mining boom powered by the Chinese, and many people feel this boom has several years to run and further gains to achieve.

The downside

Is there a downside to having higher valued currency?

This is the first time the Aussie has matched parity with the US dollar since 1983, but it's not without heavy costs. Exporters and the local tourism industry will both suffer from the higher value Aussie. Prime Minister Julia Gillard warned how it is possible the booming mining industry in Australia will outperform the service and manufacturing sectors, creating a “patchwork” economy. If some parts of the country boom while others go backward, there could be trouble. She says, “We will only remain strong if we have ensured that our economic growth is broadly based and growth sustained over time without putting upward pressure on inflation and interest rates”.

Wayne Swan, the Treasurer, warned that the strength of the Aussie could also slow a plan to return the country budget to surplus by the year 2012-2013.

The impact

The higher currency will impact tourism, education and company profit margins. Tourism in particular will lose it's competitive edge. As people from other countries consider where to take their next vacation, they are more likely to look to countries where their money goes further – so US travellers in particular aren't as likely to choose Australia for their next trip as long as Australia's dollar is matched – or higher – than their own. Not to mention, Australia's own vacationers will be more likely to use their bolstered purchasing power by planning overseas holidays instead of sticking around to holiday in their own country.

Reserve Bank of Australia deputy Governor Ric Battellino has said businesses will need to adapt to the stronger currency, and that it would be a mistake for the government to step in and try to manage the foreign exchange market with any kind of intervention. Other banks in the Asia-Pacific region have already intervened to limit their own currency gains and shield exporters from the effects.

Next » The Australian Economy in 2011

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