A lot has been written and said about the value of the Australian dollar in recent months as it has fallen, much as it is supposed to when markets are volatile and commodities are on the nose.

Wild forecasts about the currency falling to 50 cents grabbed the headlines in the same way that breathless reporting charted the fall of the currency in 2001, 1997 and 1985-86. And guess what happened? The currency bounced back again, as it has done over the past 10 days.

It could quite easily fall again, but it is taking much of the pressure on the economy from the global financial turmoil, as it is supposed to. But some in the media and market commentary gangs find that difficult to understand, hence the breathless prose.

That fall has been as much due to the surge in the value of the US dollar as commodity prices fell, the prospects of recession loomed, and then the credit crunch became a freeze and sent worried investors heading for the safety of the greenback and US cash and bonds.

The Aussie dollar fell well under 60 US cents, helped by the interest rate cuts in September, and then the big 1% chop last month. The Reserve Bank intervened, especially in the US dollar and yen markets for three days in a row when the currency was under 61 US cents and under 60 yen: the currency has bounced well since those lows and the central bank would be sitting on some very nice profits as a result.

Last week there were signs of a turn as the US dollar weakened because the credit freeze was thawing. That thawing has continued as global rates fall.

Even commodity prices have bounced in a bit of a relief rally: oil jumped to close to $US70 a barrel overnight, copper rose, gold was up, more as an investment and trading proposition than as a haven for worried investors. And sharemarkets rose for a sixth day in Europe and were up strongly in the US ahead of the election result.

The Aussie kicked up 10% last week and not too many of the chickens who squawked that the sky was falling when it was plunging in October were around to mark the recovery.

And overnight it bounced again, hitting 70 US cents, despite an initial fall in Australian trading after the cut of 0.75% by the RBA in its cash rate. Seeing our long term average against the US dollar is around the 72 cent mark, the dollar is in fair value range at the moment.

But it was as much the weakness of the US dollar as anything else that saw our currency rise.

The US dollar in fact had its biggest fall against the euro since that currency’s 1999 debut: no wonder the punters re-emerged from their hedge funds to hop back into oil, gold and copper.

US traders and analysts were quoted by Bloomberg and Reuters as saying that the thaw in global interest rates as credit started moving, saw the change.

It wasn’t just the Aussie/US rate that changed:

  • The Australian dollar rose 3.3% to 69.88 U.S. cents and the New Zealand currency increased 2.7% to 60.75 US cents as the greenback slid. that reversed the fall after the RBA’s rate cut.
  • The Aussie fell by around 2.5% to 66 U.S. cents after the Reserve Bank cut the cash rate for the third time in as many months.

So the rebound was around 5%, quite strong, even by recent standards..

Brazil’s real and South Africa’s rand rose against the greenback, Japan’s yen dropped against the dollar, the euro, the Australian dollar and New Zealand’s dollar as a rally in stocks encouraged investors to buy higher-yielding assets financed by low-cost loans in Japan’s currency. (Oh, no, the carry trade is back!)

Bloomberg said the London interbank offered rate (Libor) that banks charge each other for one-month loans in US dollars slid for a seventeenth day as central-bank cash injections and interest-rate cuts worldwide showed signs of reviving lending. The rate dropped 0.18%

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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