The Australian dollar rollercoaster

As a slight departure from my articles over the last few months (which dealt with the meltdown in global share markets) I thought I’d write about the meltdown of the Australian dollar. Of course, everything is inter-connected in the world of economics and the demise of our currency has a lot to do with what’s been happening in capital markets in general. My advice is to buckle up as the ride is likely to get even more wild in the months to come.

Stepping back in time, at our peak back in 1966, $A1 bought you $US1.12. Those were good days, at least as far as the dollar was concerned. The lowest level that we reached against the greenback was in 2001 when $A1 bought you only $US0.49. Earlier this year we hit a peak of $US0.98 and you may remember a lot of people were talking about us reaching parity with the US dollar by Christmas.

However, since then we have dropped a staggering 30 percent against the US dollar. Regarding some of the other major currencies, we’ve also fallen around 25 percent against the British pound, 25 percent against the euro and around 45 percent against the Japanese yen. We’ve even fallen against the Kiwi dollar. The simple fact is that the Australian dollar has fallen against pretty much every currency in the world.

There is a lot of pressure on the Australian dollar at the present time. We were once seen as a good safe bet for fixed interest fund managers and our dollar was in high demand as a result (it’s all supply and demand). Things changed when our interest rates began to fall (so we became increasingly less attractive to these masters of the universe). Moreover, the extraordinarily large US hedge funds that had been our friends started dropping our currency in favor of the US dollar in order to deal with debts they had back home.

It hasn’t helped matters any that commodity prices have fallen sharply in that time as well -” we are a commodity based economy. We are expecting to see another official rate cut in December which is more bad news for the Australian dollar.

Moreover, if the US is going into a deep recession and, as a result, China (our major buyer of commodities) is going to be slowing then we represent an even greater risk to currency investors. Some experts say that we could fall below $US0.50 in the near future. They may be right.

Personally, I think that the market has gotten a bit carried away with their negative views on the world economy as a whole. Yes, the masters of the universe were a bit naughty (I’m being kind here) and property prices around the world were too high but most of the volatility we are seeing now in all markets is based more on fear than it is on reality.

However, right or wrong, panic and ignorance are genuine variables in markets and things will get worse with the Australian dollar before they get better.

Remember, I am available to chat with any readers who have personal questions, so don’t be bashful about calling me on 02 9922 2555.

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