Joy and sorrow at the rising dollar
Rebecca Valenzuela
By Rebecca Valenzuela
In August 2010, the Australian dollar reached parity for the first time since it was floated in 1983. It has remained around this mark for almost six months. The strong showing points to the remarkable strength of the Australian economy, which survived the 2008-09 global downturn relatively unscathed.
A strengthening of our currency means demand for the Australian dollar is increasing in the international money market. Such an appreciation can be due to any combination of key factors. However, with the US economy remaining weak and struggling to recover, with high unemployment in both North America and Europe and with interest rates everywhere at record lows, it appears that our relatively high interest rates are the main reason for the Australian dollar’s rise.
Because of the economy’s comparatively strong performance during the global financial crisis, Australia enjoys much higher interest rates than the US and other advanced economies in the G20 group. High and rising interest rates are critical for drawing in investment funds and speculative accounts in the economy, and so will increase international demand for the Australian dollar.
The strong demand is boosted by a couple of other factors:
- As the world’s fifth most-traded currency, the Australian dollar attracts buying interest from central banks wanting to diversify their reserves away from the US dollar.
- The China-fuelled mining boom in Australia is expected to continue in the medium term. The strong international demand for our mineral products has also buoyed our dollar.
While the dollar’s strength makes imports and overseas holidays cheaper, it also makes our exports more expensive. The motor industry, in particular, has been hit hard because it already faces strong competition from low-priced imports and struggles to maintain export markets in the Middle East, where currencies are tied to the US dollar.
Pressure from the currency is being strongly felt in the tourism sector as potential tourists begin to look to the US for value. Thanks to above-parity exchange rates, higher air fares and accommodation costs ensure Australia loses its edge.
The multimillion-dollar education sector is also taking a beating. In recent years, an Australian tertiary education has represented good value for money for many foreign students. Our traditional hold on students from Malaysia, Indonesia, India and China is now threatened by the rising dollar, as students shift their interest to the US and Europe.
The farm sector is likely to be hard hit by the currency rise. Australian meat, wheat and wine products now appear much more expensive to foreign consumers than a year ago. Producers can only hope the high quality of their produce will allow them to withstand the effects of the price rise. There is quiet optimism among winemakers, although we face very tough competition from the US and European wine industries.
The Australian dollar is putting pressure on the sales of wheat, our main crop export. Australia supplies between 8 and 15 per cent of world trade, making it the fourth-largest exporter after the US, Canada and the European Union. Australian wheat is shipped to more than 40 countries — mostly in Asia and the Middle East. As with beef, lamb and wine, Australian wheat is known for its high quality: it is white, clean, dry and insect-free. Exporters can only hope these characteristics will weigh heavily in the international wheat buyer’s mind.
Overall, the stronger Australian dollar is expected to damage company profitability, which could undermine Commonwealth budget revenue. Lower tax revenues mean the government would not have sufficient income for some of its school, health and other infrastructure projects. This concern is now even more pressing in light of the costs required to rebuild flood-affected areas in Queensland, NSW and Victoria.
It is certainly a difficult time for developing policy.
Rebecca Valenzuela is a senior lecturer at Monash University's department of economics within the Faculty of Business and Economics.