Bold predictions on the Aussie have our currency exceptionally strong for you years to come.
In February, the Australian dollar hit a 7 month high against the greenback of $1.08 – a 10 per cent rise against the US dollar since last November when it briefly dropped below US97c.
In a speech delivered on February 1 that addressed the Australian economy, Julia Gillard praised the strength of the Aussie dollar and made the prediction that “our dollar is likely to remain relatively high for years to come”.
While this is a brave call, it is interesting to look at the reasons behind the strength of the Australian dollar – why is it currently so high against all the other major currencies?
The Asian Boom
There is general consensus that the principal reason behind the strong Aussie dollar is that Australia currently fits the needs of one of the fastest growing regions in the world – Asia. Australia’s strong Asian ties and Asia’s demand for our resources all work in the favour of the Australian dollar, and have helped sustain the rise of the Australian dollar against other leading currencies.
Mining boom
As Asian countries are passing through a commodity intensive stage of economic development, they have helped fuel a mining boom in Australia. As the mining and export industry thrives, the value of the Australian dollar rises. Strong demand – particularly from China – is driving this process.
Volatility in EU and US markets
The current volatile market situation in the US and particularly Europe has helped make Australia’s currency appear to be a safer alternative to investors. As the European debt crisis continues the Euro remains unstable, further weakening it against all major currencies, including the Australian dollar. The volatility of the Euro also impacts the value of the British Pound. With Australia’s strong exchange rate, comparative market stability and the expectation that the demand from Asia will continue, speculative investment in Australia has soared.
Healthy economy
The strength of the Australian dollar is not only a product of weaknesses in other major currencies. With low government debt, steady unemployment levels and a Triple A credit status, Australia’s economy is in a relatively healthy position, particularly compared with other major currencies including the Euro, US dollar and the Pound.
These are just a few of the main reasons behind the current strength of the Australia dollar. But how is it expected to perform over the coming months? Julia Gillard’s prediction that the strong Australian dollar will be around for ‘years to come’ is bold, with it difficult to accurately guess where the currency will sit in 3-6 months, let alone years to come. Some economists have suggested that the Australian dollar could reach $1.50 against the greenback and parity with the Euro. Most forecasts are based on the premise that as long as strong terms of trade continue between Australia and Asia, so too should the strong currency.
There has, however, been some backlash against the strong Australia dollar because there are both winners and losers when it comes to a strong exchange rate. A strong Australian currency hurts those who rely on the flow of foreign capital to make a living. A high currency can slow the economy down, and dollar-exposed industries such as tourism, manufacturing and education are flagging while the Aussie dollar soars.
If the Australian dollar continues to rise against the other major currencies, the government will need to balance the strength of the Australian dollar against the negative impacts on some Australian industries.
This information is brought to you by OzForex Currency Exchange Service. It is not intended to constitute financial advice of any kind.e.