Friday, September 04, 2015

Going down. Why 60 US cents might be just what we need

The Australian dollar has dipped below 70 US cents twice in the last two days. Next time, it's set to stay below 70 and keep falling.

Economist Saul Eslake is talking about 65 US cents in a matter of months. Shane Oliver is talking 60 US cents. Others are talking values in the 50s. If there's one thing that's certain about moves in the dollar it's that they usually continue much further than they should before swinging back, like a pendulum.

Asked where the dollar should be back in December when it was near 85 US cents, the Reserve Bank governor Glenn Stevens said if he had to pick a figure, he would say probably say 75 rather than 85.

Work on the fundamental value of the dollar based on the relative cost of purchases in the United States and Australia suggests 'fair value' is around 73 US cents. It's the level at which after swapping one currency for another you find the prices unchanged when you move between countries.

Just as the Australian dollar was too high a year ago at 95 US cents, it'll be too low at 55 or whatever it reaches before it swings back...

Pushing it low right now are expectations of a hike in US interest rates, the first since the financial crisis, which will make the US a relatively more attractive place to park money and Australia a relatively less attractive place.

The greater uncertainty that'll flow from the change will also make Australia relatively less attractive, as will any further cuts in Australian interest rates. And sliding export prices are weighing on the dollar as well.

Four years ago iron ore was worth $US180 a tonne. Today it's worth $US56. If Chinese and other buyers don't need to pay as much to buy our products they don't need to buy as much Australian currency to make their purchases.

A lower dollar means higher prices (although perhaps not as high as when it hit its all-time low of 47.70 US cents in April 2001).

But it also means that firms the high dollar locked out of foreign markets suddenly find themselves competitive. This week's national accounts showed manufacturing growing for the first time since 2011. Architects, universities and all manner of firms that try to sell overseas are back in the game. It's what we need.

In The Age and Sydney Morning Herald


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. October 2014. RBA: Dollar overvalued, “and not by just a few cents”

. December 2013. 'Twas the dollar that killed Holden, not the carbon tax

. October 2010. Learn to love the higher dollar