Wednesday, May 07, 2008

One Aussie dollar to equal one US dollar

It's good.

So Westpac is expecting a one US dollar Australian dollar.

In fact the bank expects the Aussie to climb even higher than the US dollar over the the next year eventually hitting around US$1.02 next March.

It is entirely possible that that will happen and it would be a good thing.

The last five years make clear why it is possible. Over each, on average the Aussie has climbed 12 per cent against the US.

We only need another 6 per cent to reach parity and then sail higher...

Australia's cash rate is 7.25 per cent, the equivalent rate in the US is 2 per cent, so it easy to see why investors would continue to find it attractive to take their money out of the US and put it here.

Australia's prospects look better too. Here people are desperate to buy houses. In the US they are desperate to sell them. Here our economy is growing so fast that the government and the Reserve Bank are worried. In the US things are not too far away from a recession.

The only obvious things that might hold back the Australian dollar are the prospect of a world-wide capital strike (which is receding) and our ever-worsening current account deficit (which should improve as our export volumes pick up and our export prices climb further).

A higher Aussie would be a good thing because it would spread the new wealth.

Australia's terms of trade is a measure of the extent to which the prices for things we sell exceeds the prices for things we buy.

In the last four years it has jumped 40 per cent. The forecasts to be released on Budget night are likely to show that in the coming year it'll jump again to be 70 per cent higher than it was five years ago.

Those forecasts are based mainly on minerals price rises already negotiated.

Our mining companies are set to get even richer.

Without a further increase in the value of the Australian dollar that extra wealth would largely stay in their hands and in the hands of their workers and the people who service them in the resource rich states of Western Australia, Queensland and to a lesser extent South Australia.

A higher dollar dampens that direct reward and spreads more generally by giving all Australian greater buying power.

Without it Australia really would divide into two nations – one richer, one poorer – and our present inflation problem would be much worse.

It used to be argued vigorously that a higher dollar would hurt Australia by hurting our exporters.

But right now our exporters look good. And that's after a serious of huge hikes in the dollar.

Even our farmers have little to complain about on that front right now. If the drought allows them to make food they will find plenty of willing buyers prepared to pay ever increasing prices.