Flucations in the Australian Dollar

The Australian Dollar is a "Commodity Currency". A "Commodity Currency" means that its fortunes are heavily dependent on the prices of Gold, Copper, Nickel, Coal and Wool. All of these commodities are Australia’s main exports.

At present, commodity prices are low, especially gold. Melbourne-based mining consultant Surbiton Associates said exports of Australian gold were in danger of declining if exploration failed to be supported and production declined as a result. The country produces about $5 billion worth of gold each year and over the past 10 years the metal has earned $42 billion in export revenue.

Presently, our dollar has been the weakest in history, comparable to the United States (US) dollar. The record low occurred in early April where it sank to 47.75 US cents. Compared to the US dollar, our Australian dollar buys at present 50.81 US cents. (27 July 2001).

It is unrealistic to determine what started the dollars slide or when it started. In this graph it is visible that the dollar started to drop as far back as April 1997. Although, we can never be sure that the fluctuations are actually fluctuations in the $A or those of the $US.

For that reason the following figure shows the movements in the $A against the trade weighted index (TWI). As its name indicates, the trade weighted index tries to measure the value of the $A against a basket of currencies. Those currencies are chosen to reflect the weight in Australia's trade with the countries issuing the currencies in the index.

At the moment, the US dollar is very strong. This is surprising considering that the American economy is not very strong. Interest rates in the US basically show the situation. Americas interest rates have seen five cuts over the last four months to where it now sits at 3.75%. This was the US governments’ way of trying to kick-start the economy through fiscal policy. This is why many economists believe the US dollar will subside, as there is no backing in the economy.

The “Aussie”, as it is referred to in foreign markets, is believed to be dependent on the performance of the Japanese Yen and the new Eurodollar, with the three currencies tending to move in tandem. This is because of Australia’s importing and exporting relationship with the two other currencies.

Interest Rates At the moment the interest rate in Australia sits at 5%. In resent times interest rates have been subject to three cuts. One on February 7th that cut interest rates from 6.25% to 5.75% down half a percent, another on March 7th this time down a quarter of a percent and finally on April 4th were it was cut once more by half a percent down to 5%.

The interest rate cuts were caused by the dollars instability and also by, building approvals which were down around thirty per cent comparable to the previous period. This was the government’s intervention into kick starting the economy; to inturn get people spending, creating a demand for the Australian dollar by, building more homes. This process takes time to react, around twelve to eighteen months, therefore the interest rate cuts have not so far affected the dollar.

Positives to come out of a weak Aussie dollar Ever since, other markets noticed the “Aussie” plummeting they, especially the US, started purchasing more of Australia’s exports. This is one of the positives to come out from the Australian dollar’s low level. Also if the dollar is low it keeps the current account deficit low. This is the situation, as Australians will not buy imports when they are expensive therefore not growing Australia’s international debt or current account.

Negatives to come out of a weak Aussie dollar Comparatively to the positives, the negatives are that imports are far more expensive. As Australia imports around eighty per cent of its product that it uses, the negatives of a weak dollar out way the positives of having a weak dollar for the average Australian. Although, as a nation it would be better for Australia to have a weak dollar if we could produce more of a variety for our own consumption. This is so, because if we had a weak dollar exports would be up, imports would be at a minimum and therefore the current account deficit would be kept low. Although, those necessities that we would need to import would be placed on the current account that would need to be paid back in the foreign currency which would most likely be greatly stronger than the Australian therefore limiting this situation.

Internal Causes Internal causes of the low dollar include the low commodity prices, the balance of payments gap and interest rates. The view is also being advanced that the decline in the dollar's value is an expression of deeper processes, bound up with the changes associated with new technologies and the Internet. These concerns are summed up in the claim that Australia is being increasingly viewed by international markets as an “old economy”. An old economy meaning that it is based on the export of raw materials and minerals, and does not have the new technology-based industries necessary to attract international capital.

External Causes As our dollar is only being compared to the US, it may be just the case of the US dollar being so strong. In this case, as it partly is, the US dollar is far to overrated.

Were the dollar is going Daniel Bases believes “As increased prospects for global economic growth boost prices of raw commodities, currencies including such as the Australian, Canadian and New Zealand dollars and the South African rand that are economies highly dependent on the export of natural resources will begun to gradually rise.”

Similarly, I believe that the US dollar will subside and as the US dollar lowers the Australian dollar will go up comparatively. The Australian dollar will also rise over the next twelve months because of commodity prices increasing recently. Although overall I believe the dollar will sit comfortably at US 57 cents by the end of the year.