Why Australian Dollar Is So High

Ask any currency expert what is moving the Australian dollar above $US1.07 and they will cite a list of factors ranging from the strength of the Australian economy, the weakness of other currencies, bond yields, risk appetite and our (relatively) high interest rate.
What ultimately drives the price of anything - shares, goods, services or a currency - is supply and demand. The factors above just go to explaining why the dollar is in such strong demand.

The biggest single event that has moved our currency over the past few days is the downgrade by ratings agency Standard & Poor's of US sovereign debt to a negative credit watch.

The effect of this is to decrease the likelihood that the US will increase interest rates - which in turn would push up the value of the US dollar.

This is the fundamental reason the Australian dollar has been so strong over the past six months. In addition, just about every other Western economy has been in a race to devalue their currency in order to stimulate growth. In this respect our robust currency has more to do with the weakness of the others.

Ours is one of the few currencies that is not being overly manipulated by its central bank boosting supply to keep it low. This is another reason foreign exchange dealers around the world like the Australian dollar - it is a currency that is bought and sold freely. (Despite our size the Australian dollar is the fourth most traded currency in the world.)

The US debt re-rating has also moved the global risk settings. When risk assets receive a bigger weighting there is a stronger tendency to buy the Australian dollar.

It's hardly surprising given that the Australian economy is one of the star pupils of the world economic class.

Amid the turmoil in several European economies and the enormous deficits faced by advanced economies, ours stands out as one that is promising a budget surplus and relatively strong growth.

Right now Australia is a haven, with a strong economy, secure government and plenty of sought-after resources in the ground. (The fact that our resource companies are investing billions to bring on more supply is of no apparent concern right now.) This is too medium term for the currency traders to worry about. Currency operates in the short term and moves by the second in response to news factors.

Yesterday, for example, our currency moved up 30 basis points over 10 minutes in response to the announcement of the US production price index, which was ahead of expectations. This lifted the chance of Australian interest rates being raised later this year, putting more upward pressure on the Aussie.

Besides the reasons enumerated above for our currency being so high, there is another factor at play. Right now no one can find much of a reason to sell it. According to one senior bank commodity expert an increasing number of foreign central banks are getting in on the act.

So, what will be the tipping point? The first will be when the US Federal Reserve lifts interest rates. There has been an expectation for a while that this is on the cards but the likelihood of this taking place any time soon is receding.

If the oil price runs too high this could dampen growth. Then there is China - if it sneezes, the Aussie will certainly catch a cold.

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Source: www.smh.com.au/business/a-central-factor-in-the-rise-and-rise-is-why-sell-20110421-1dqlf.html