Herald Sun

Cur­rency crunch not so much our weak­ness as US strength

- Ge­off Saffer is se­nior in­vest­ment strate­gist at Elite Wealth

THIS week the Aus­tralian dol­lar-US dol­lar ex­change rate hit its low­est level in more than six years.

There are many rea­sons for the Aussie dol­lar weak­ness — com­mod­ity price weak­ness, a slug­gish econ­omy, re­cent (and pos­si­bly more) in­ter­est rate cuts.

But for all the blus­ter about how hard the Aussie has fallen against the green­back, one very cru­cial point has been glossed over. The fall has not so much been a case of Aus­tralian dol­lar weak­ness, but mostly due to strength in the US dol­lar.

Ev­ery ma­jor cur­rency has strug­gled against the US dol­lar in the past year.

The first chart (above right) shows how var­i­ous key cur­ren­cies have per­formed against the green­back since the end of June last year.

The Cana­dian dol­lar (-17.5 per cent), euro (-20.1 per cent) and Ja­panese yen (-18.2 per cent) have all fallen al­most as much as the Aussie has against the green­back, while the poor Ki­wis (-25.1 per cent) have suf­fered an even big­ger drop.

For the US dol­lar we have used the US dol­lar in­dex — a num­ber that com­pares the green­back against a set group of six cur­ren­cies.

The fall­ing Aussie dol­lar is sup­posed to make our ex­ports cheaper for over­seas coun­tries and drive up the price of im­ported goods.

But of course, we don’t only con­duct trade with the US. The next chart shows how the Aussie dol­lar stacks up against our ma­jor trad­ing part­ners (ranked big­gest to small­est, left to right).

The Aussie has fallen against the cur­ren­cies of five of our six big­gest trad­ing part­ners (NZ the ex­cep­tion), but most of the falls are much smaller than against the US dol­lar. The fi­nal bar on the chart shows the Trade Weighted In­dex. This is a great in­di­ca­tor — as it shows how the Aussie dol­lar has per­formed against our trad­ing part­ners, ad­justed for how much we trade with each coun­try.

Of course to many read­ers the most com­mon rea­son to ex­change Aussie dol­lars is to travel over­seas. The num­ber one over­seas des­ti­na­tion for Aus­tralian trav­ellers is New Zealand, where the Aussie dol­lar will take you fur­ther than a year ago.

Af­ter that, the news is not so good. The next four com­mon des­ti­na­tions will set you back quite a bit more these days — In­done­sia (Aussie de­pre­ci­ated 16.4 per cent), US (-21.9 per cent), Thai­land (-17.6 per cent) and the UK (-14.5 per cent).

Which­ever way you slice it the Aussie dol­lar has been weak re­cently, but not to the ex­tent that has been gen­er­ally por­trayed by the media and many fi­nance ex­perts.

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