The Australian dollar has had a very good Christmas-New Year break, but don’t expect our business journals, commentators or analysts to tell you that. It is far easier for them to pitch the gloom and doom line on behalf of clients, mates or easy headlines, courtesy of the retailing, manufacturing or tourism sectors — and then there’s the latest fashion, fearless forecasting of  “white collar recessions”.

Nor have we heard from our politicians about what a strong dollar really means for them and us (as taxpayers): not quite austerity, but it will feel like it as the need for brutal honesty about budgets, spending and spending overrides (at the demands of markets), the easy way of spending future income on present needs.

There’s been little in the way of a dispassionate look at the way the Australian currency didn’t slide over the break, why it didn’t, and what it means. That performance says more investors overseas now view the Australian dollar as a store of value in troubled times. There are still risks, given we are a commodity based economy, but the currency has other virtues: low debt, falling government spending, excellent growth prospects and a universally-endorsed AAA credit rating (and transparent, reliable legal and accounting systems).

The Aussie’s strength from the start of last December up to now has been remarkable. The US dollar has risen by around 7% against the faltering euro; normally the Aussie dollar weakens as the US dollar strengthens, but that didn’t happen over Christmas-New Year.

Some analysts claim that was due to the more confident tone in markets, but that ignores the changed view of the Australian dollar offshore. In fact, the dollar was marginally higher at $US1.0320 on Saturday in New York, compared with the $US1.0256 finish in Sydney on December 1. It had eased to just under $US1.03 in early Asian trading this morning. In the same time the Aussie dollar has risen to a series of all time highs against the euro, topping 81 euro cents last week.

If the dollar had followed previous patterns, it would be eased against the stronger greenback, but still risen against the much weaker euro. But that didn’t happen.

The dollar’s attractiveness will have only increased following last week’s Black Friday, which saw the continent’s 2011 woes dragged back from their Christmas holidays courtesy of Standard & Poor’s downgrades of nine eurozone economies, including AAA-rated France and Austria. That means Australia is now just one of 14 AAA-rated economies around the world.

That coincided with more bad news from Greece over stalled negotiations to implement one of the litany of summit deals from 2011, involving the extent of the haircut private debt holders will take for the Greeks. Greece is now on track — well, more on track — for default: it has to redeem a 14.4 billion euro bond on March 20. If default happens, the investors and others will charge into safe currencies, led by the US dollar, and eventually including the Aussie dollar.

Even if Greece manages to finance the redemption and a deal is done, there are plenty of other opportunities for problems to emerge after last Friday’s string of downgrades, which have effectively reduced the firepower of bailout funds like the European Stability Fund, which will find it harder to raise money and maintain a AAA rating without huge new contributions from Germany.

Adding to the strength of the dollar has been the re-emergence of the euro carry trade as a new whiz for yield hungry investors (it used to be the yen carry trade) looking to move out of euros. Investors borrow in low cost (1% or less) euros and invest into higher yielding assets in Australia. On top of this, central banks and other big investors have been moving out of euros and the US and into other currencies, such as the Aussie and the Canadian dollars as they seek greater diversity for their reserves and assets.

Our dollar is now viewed increasingly by investors offshore as a haven of value, hence the sharp fall in market interest rates here in the past eight months.

The strong dollar will allow the RBA further room to cut rates if problems in Greece intensify, or China slows. We find out tomorrow about Chinese fourth quarter and 2011 economic growth, plus data on production, retail sales and urban investment, but Chinese steel production is now running at its lowest level for more than a year and won’t pick up until much later in 2012.

But for sectors like manufacturing, retail and tourism, the dollar is now the 800 pound gorilla in the back of the economy, waiting to wreak havoc on the weak, the lame and the out of touch in business and help those nimble enough to adjust. Australian businesses have traditionally played the weak dollar for all its worth, as have governments. It has protected the inefficient and allowed exporters of all sizes to make easy gains in sending goods offshore, regardless of whether they were being produced here at a profit (think cars). Now that is no longer the easy way out.

That applies to governments, too. By sending a competitive shock through the trade-exposed economy and curbing growth in big-employing sectors like retail and manufacturing, the dollar will curb tax revenues. While the miners and the banks will continue to produce super profits, other sectors will underperform as revenue raisers, putting further pressure on the budget and on politicians to keep spending down. It also means that our budget will become even more reliant on pro-cyclical sectors, a problem that began developing as a result of the mining boom and the Howard government’s personal tax cuts and which Wayne Swan had to wear when the GFC-induced slowdown ripped tens of billions from his budgets.

Moreover, the revenue challenge is already flowing through to state governments courtesy of lower tax revenue and lower GST payments.

There’ll be plenty of opposition politicians at both levels ready to declare that it’s all the fault of governments, but it’s only another variation of the restructuring impact that the dollar is having on the economy. Foreign investors have ensured that the days when Australian governments could afford to ignore hard budget decisions are over — not because they’ve turned against us, but because they like us too much.

Peter Fray

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