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Tuesday, 9 December 2008

The Aussie dollar

If the Oz economy is so much better than the USA one, why has our dollar dropped so much recently against the greenback? — Arlene J Macdonald 

We asked Amanda Tan, Currency Specialist, St George:

The main reason for the slump in the Australian dollar is overall financial market volatility rather than the Australian economy’s performance in relation to other economies. When the financial crisis hit in September and October, the Australian dollar started to rapidly depreciate.

Right now it’s fear driving markets rather than the fundamentals. Commodity prices are falling and this has affected the domestic economy and added to pressure on the dollar.

The Reserve Bank’s rate cut cycle has diminished the dollar’s status as a high yielding currency. We’ve also seen an unwinding of carry trades as financial volatility has hit (Investopedia: A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate) as FX customers avoid the Australian dollar and seek a safe haven in the US dollar and the Japanese Yen.

Crikey welcomes your dumb questions, and will find someone smart to answer them. Send your suggestions to boss@crikey.com.au with “clarifier” in the subject field.

One Comment

  1. steve martin
    Posted Tuesday, 9 December 2008 at 3:55 pm | Permalink

    As many of our exporters receive payment in US dollars a falling Aussie dollar is beneficial .It also makes imports more expensive which assists Australian businesses which compete imported products.
    Every cloud has a silver lining!