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Australian Dollar’s Plunge Continues

Great article about the recent Australian Dollar's Plunge on Australasian Investment Review.

It's now the biggest imponderable for Australian business. Just as we seem to have pushed high oil prices and inflation to the back of the agenda with last week's Reserve Bank hint of a rate cut, possibly next month, the plunging value of the Australian dollar will force us to keep oil and cost pressures in the forefront of our mind.

Exporters will be having a quiet cheer, the pressures of a 98 USc Aussie dollar and the prospect of parity with the US currency, have been ended by the near 10 USc drop in the value of the local currency in the past three weeks.

The Aussie fell more than 4% last week alone against the US currency and the loss since its peak last month is now well over 10%.

Suddenly exporters are getting more for their exports, while importers are having to pay a bit more, including importers of oil and petrol.

Big investors feel the uS has better recovery hopes than Europe, Japan or emerging markets; even though those emerging markets are still growing and the US is sluggish.

Analysts say there's enough economic information being released in the US this week to eithger back or dash this view. It's a view that ignores the continuing slump in house prices and forecsts that this will continue for much of the remaining months of 2008.

But the impact will be small to start with, but with the US dollar now on a major rebound against the rest of the world, a fall to below 85 USc must in mind for many analysts.

The currency closed at 88.85 USc in New York early Saturday morning, down sharply from the close the previous Friday of 92.92 USc and 95.84USc the Friday before that in Australia.The dollar fell again this morning to under 88.70 US cents.

Seeing the currency peaked at over 98USc in early July, it has been a very sharp fall in almost a month

The US dollar's dramatic rally this week has prompted some investors to say its seven-year slide may be over, as the focus shifts from US economic woes to the spread elsewhere of the credit crunch-inspired slowdown.

The greenback had its biggest weekly gain against the euro in eight years last week. Friday saw its biggest one day gain in six weeks.

The euro fell 3.6% to $US1.5005 Saturday morning, from $US1.5564 on August 1, the biggest weekly decline since January 2005.

The currency tumbled 2.08% Friday touching $US1.499, in what was the second biggest one-day decline since the introduction for the euro in 1999.


It is now US 10c below its record high above $US1.60 struck only a month ago.

The rally was driven by The European Central Bank warning on Thursday that growth is slowing, meaning no more rate rises.

It was the ECB's 0.25% rate increase in the first week of July that prompted the drop in the value of the greenback and surges by the euro, Aussie dollar and other high yield currencies.

The NZ dollar's rise was stopped a few days later by its central bank cutting rates 0.25% to 8% as recession took control of the Kiwi economy.

Since mid-July, oil prices have tumbled $US30 from their record peak above $US147 a barrel; Japan's government has said the economy may be in recession, and a continuing series of eurozone indicators have signalled an impending downturn.

Italy in fact Friday revealed its economy was contracting and figures this week could signal the slump evident in Italy, Spain and Ireland has now spread across the entire 15 country eurozone.

Britain is sliding as well, Denmark has slowed and there's now strong suggestions the German economy has gone from 5% growth in the March quarter to a probable contraction in the March quarter.

The UK pound fell to its lowest level against the US currency in more than 11 years.

The dollar also advanced elsewhere, reflecting the positive shift in sentiment towards the currency that will continue now there's recession on the way (in the market's mind in the US, Europe and Japan).

The dollar had solid rises against the US, the Swiss franc and the Canadian dollar as well as the pound, euro, sterling and Kiwi currencies.

After the RBA left interest rates at a 12-year high of 7.25% and signalled a coming rate cut, the downward pressure on the Aussie intensified; especially after the ECB sent its no rate rise message.

The euro's dramatic drop last week suggests that the currency's long-term climb - which has almost doubled its value from 2000 to last month's record high above $1.60 - may be over.

The sharp recovery of the dollar since July is reportedly prompting investors to consider an increased focus on hedging their positions against foreign currency weakness against the dollar: a big change in sentiment in the past few days.

The sell US dollar-buy commodities lurk used to be the easiest money game in town for hedge funds and other aggressive investors after the bottom fell out of credit and equity markets.

It seems no longer, and the possibility of being burnt by a surging greenback is now all too real.

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