Currency crunch not so much our weakness as US strength

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.