World Wallops Aussie Dollar

Sydney Morning Herald

Monday October 27, 2008

Scott Rochfort and Erik Jensen

GLOBAL financial markets have singled out the Australian dollar for special punishment. Over the weekend the local currency was subjected to its biggest sell-off since it was floated in 1983.

As the gloom darkens over the global economy, the frenzied sell-off on world sharemarkets has spread to currency markets, and the Australian dollar reached a five-year low of 60.57 cents against the US dollar and a record low against the Japanese yen.

The big fall in the Australian dollar prompted the Financial Times in London to dub the currency the "whipping boy" of foreign exchange markets.

The dollar closed in US trade at US61.78 cents, down US4.5 cents on Friday night and 37 per cent from the high of US98.49 cents it reached three months ago.

The slump has confounded even the most seasoned commentators. The dollar has even been strongly outperformed by Iceland's hapless krona and Brazil's real over the weekend.

"It's just strange. It's just weird," said the chief economist of BT Financial Group, Chris Caton. Dr Caton said about a third of the fall could be explained by the recent surge in the US dollar, which has risen against currencies such as the euro and the British pound.

"There's no rational reason for us to be at 62 cents," he said.

The chief equities economist with CommSec, Craig James, said the fall in the dollar could be a blessing for the slowing domestic economy because it would provide a boost to exports.

"It's something we shouldn't fear here in Australia."

Like the fall in the currency in 1997 that helped buffer Australia against the ravages of the Asian economic crisis, Mr James said, the slump could offer protection against the global financial turmoil.

Importers, especially retailers, face the challenge of paying more for goods that will be increasingly difficult to sell in a slowing economy. However, it remains to be seen whether higher import prices could translate into higher costs for consumers.

An economist with NAB, David de Garis, said it was possible retailers and importers could decide to forsake profit margins and keep a lid on prices. "It depends on consumer demand."

The vice-president of the National Farmers' Federation, Charles Burke, said every percentage point lost against the US dollar was worth a $190 million cash increase to net farm income.

"Most agricultural commodities compete on international markets and will benefit from the improved competitive position that the lower dollar brings," he said.

The national manager of advocacy at the Association of Mining and Exploration Companies, Darren Brown, said parts of the resources sector would see the dollar's crash as welcome relief.

"For those who are exporting, the fall of the dollar might go to compensating them for the fall of commodity prices," he said.

Economists do not expect the dollar will fall as low as the US47.75 cents it reached in 2000. The Commonwealth Bank predicted last week it would hit US59 cents by March.

"We've got downward revisions to worldwide growth which is putting downward pressure on commodity prices and the Australian dollar," said the bank's senior currency strategist, Richard Grace.

He said one concern driving fear about the Australian dollar was the country's current account deficit.

Mr Grace said another albeit smaller factor was that Australian fund managers with investments overseas were reducing their currency hedging. This was because the fall in global sharemarkets meant fund managers could reduce the amount of hedging they would need to cover their foreign investments.

Another factor has been the outlook for lower interest rates, which prompted Japanese investors to sell Australian dollars. Reverse "carry trades" have seen them quit their relatively high interest deposits in Australia to pay off low-interest loans they have taken out in Japan.

On Friday night, the Australian dollar reached 55.14 yen, down 47 per cent on the high it set three months ago.

Mr de Garis said the high liquidity of the Australian dollar has made it more exposed than other "high-yield" currencies. The Australian-US dollar cross is the fourth most traded in the world.

The country's biggest travel agent said it had not seen any evidence of Australians cancelling their holidays. "They are just cutting back," said Flight Centre spokesman Hayden Long.

"They might stay one less night or travel economy rather than premium economy."

© 2008 Sydney Morning Herald

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