By: Dr. Mike Campbell
Australia was the only major economy not to go into a formal recession (defined as two consecutive quarters of contraction) during the global financial crisis, and it was the first major economy to raise interest rates once the worst of the storm had passed and has been posting respectable growth figures. These factors, coupled with the fact that the Aussie Dollar is a stable currency, led to the Australian currency being selected as a safe haven currency for investors. The influx of foreign capital increased demand for the Australian Dollar and pushed up its value.
The US Dollar has been on a downwards curve against the Yen, Euro and Sterling since last summer (with fluctuations for the odd sovereign debt crisis) and it has also declined against the Australian Dollar. The Greenback has slid to an all-time low against the Australian currency hitting $1.0764 in trading on Thursday. The rise of the Aussie Dollar has been pushed higher because of increased commodity prices. Also, producer prices in Australia have increased by 2.7% this quarter which indicates that inflationary pressure is still considerable in Australia. In turn, this means that the Australian Reserve Bank may need to increase interest rates to control inflation. The rate has been 4.75% since November 2010 which is significantly higher than what is on offer in other major (democratic) economies.
A strong Australian Dollar is beginning to squeeze exporters since Australian goods have become more expensive in importing markets and is expected to hit the tourism trade as well. Visitors to Australia will be finding the destination to be more expensive as their foreign currency goes less far down under. Despite the recent Euro rally, the single European currency is buying 6% less today than it was a year ago in Oz.