The Australian dollar is the world’s fifth most traded currency and goes up and down, up and down.

Our dollar fell to 94.96 US cents this morning. It was the third drop in three days against the greenback, and it was the currency’s lowest result since September last year. What does it mean?

Why now? Greece, Italy, Dexia bank, European banks generally, dithering, bickering European politicians, fearful bankers. Hedge funds and shorters looking to make money out of fears about the strength of the Chinese economy (which is a bit better than many of the bears think). Take your pick. But there’s no home-grown reason except a misplaced view that official interest rates are going to fall. That changed last Thursday when 10-year bond yields jumped from 4.02% to 4.27%, cutting out one of three rate cuts priced in.

A few short months ago there was no end in sight to the rise of our dollar, what happened? Well, the northern summer is over, the harvests are in, the suntans have faded and when markets reawaken in the northern hemisphere, reality usually sets in very quickly, especially confronted with the bill for the summer break, the credit card spending in Greece or the second grappa after the slap-up lunch in deepest Tuscany. The mess has been festering since early August when silver fell out of bed in a few hours in trading in Asia one Monday morning. That saw gold and other commodities hit, then that reignited fears about Greece, etc. Then the traders who couldn’t go on holidays started fretting about Spain and then Italy (the third biggest bond market in the world and the biggest in Europe). Spain could be bailed out if needed (it won’t, its debt position is better than Germany’s. It’s just its deficits are high because of the recession) Concern about Italy refocused concern on Greece, with another deadline coming up for another payment of aid. The July 21 second bailout of Greece was announced but didn’t “shock and awe” markets into believing that this time it would work. And Greece became the debtor de jour and things have gradually gotten gloomier ever since. Sunday’s news that Greece won’t make deficit reduction targets (meaning its debt will rise to higher and higher levels: try 171% of contracting GDP) wasn’t “new” news, but it scared everyone and the Australian dollar, commodities, after that been scared and scarred by the biggest monthly falls in September for three years. Even gold fell 11%, that’s how terrified markets were.

Will it bounce back? Of course;  in 2008 it plunged as commodities started falling from early July and then Lehman Brothers fell over in September of that year. A sense of perspective is needed: a year ago the dollar was at 98 US cents, 13 months ago it was at 94.50 US cents, and in 2008 it was at at this level in late July, on its way down to the low 60 US cent levels. The Aussie dollar, along with the Brazilian real, the NZ dollar, the Canadian loonie and South African rand are what are called “risk on” currencies. That is when markets are confident and buying riskier assets, our dollar rises. We have the added attraction of paying a high rate of interest here on government bonds or bank accounts (thanks to the cash rate being at 4.25%) and we are also a proxy for the Chinese economy. Speculators and others buy us in good times, in times of fear and loathing, like now, they sell the dollar or short it (plus shares such as BHP and Rio). Added to the attraction of the dollar has been the move into Australian government debt by the central banks and sovereign funds of some countries who have been seeking to diversify their assets away from the US dollar and the euro, both of which are a bit wobbly.

Who’ll be welcoming the dip? Moaning whingeing companies and others. Where do we start? BlueScope Steel, OneSteel, Gerry Harvey, Myer’s Bernie Brookes and a host of tourism operators. I’m just waiting for Tony Abbott and Joe Hockeyeconomics and others in the opposition to blame the government for the lower dollar and how its hurting working Australians. It will make our trade account, which is in a solid surplus, look a lot better, thereby helping the current account deficit to fall.

Who’ll be cursing it? Nervy people who are travelling overseas for the first time and online newbies. Don’t worry, the currency could go lower, it could go higher, there’s nothing we can do, we are in the hands of the Europeans and to a lesser extent, the Americans who are, right now, trying their best to a) shutdown the US government with another brawl over a spending bill and b) antagonise China, (which is America’s banker) with a Senate resolution calling for action against China over the value of its currency. The front gates of the asylum are open for anyone to enter in the US, it really makes the Europeans look model citizens for trying to grapple with a terrible problem. Americans just sit around and ignore it and talk about anything else but the hard decisions. Americans then accuse the Europeans of not being tough enough!

What’s a fair value for the dollar? How long is a piece of string? It depends what sort of market we are in. A value around parity isn’t too far off fair value, all things being equal because our economic outlook is better than we all think. Yes it is hooked to China and other economies in Asia (we have a bigger trade surplus with Japan, did you know that?), but we have the resources boom and much of that will go to Asian economies in future years. Unemployment is low, consumption is solid, despite weak retail sales and house prices because Australians are saving more than we have for a decade, which is a very good thing.

How likely is an emergency rate cut from the RBA? Unlikely, the RBA is now focused on what will happen in 2012 and 2013, and is still concerned about inflation and a shortage of workers. But the minutes of the last board meeting were dominated by events in Europe, which seem to have gotten worse in the past month, even if in reality there hasn’t been much of a change. We are still confused, but not as confused, desperate or dateless as the eurozone or the Americans who seem, every day, to be confirming that they have no clue about what do do, which is the real reason to fear and why the RBA will cut rates if the proverbial hits the fan offshore. It’s what it did in 2008, but we are not there yet, although a banking crisis in Europe in the next week or three will be interesting. And by the way, there’s more deadlines for Europe next week, the week after and for months to come. It’s colourfully called “kicking the can down the road”. One day Europe (and that means us) will run out of road. The dollar will be weak/strong/weak/strong for a while yet. Perhaps the henny pennies among some media writers and economists might be bored into silence by the continuing volatility. One can only hope so. After all, it is the fifth most traded currency in the world and goes up and down, quite a bit.

Peter Fray

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