Ukraine war boost for dollar
Kick for Aussie commodities
THE Australian dollar has shrugged off its history and strengthened against the US greenback and other key currencies during the greatest global geopolitical crisis in a generation.
In welcome news for Aussies planning to travel overseas after two years of pandemic lockdowns, the local currency has climbed 5.5 per cent against the US dollar, 7 per cent against the British pound and 8.4 per cent against the euro since early February.
It reached US74.4c this week, up from US69.8c in late January, and is currently trading near US73.5c.
Some economists expect it to climb to US80c by late 2022 as the war in Ukraine causes supply disruptions and an avalanche of sanctions against Russia, a major exporting nation.
The dollar’s surge is a change of tradition, as it usually sinks in turbulent economic and political times, as it did during the pandemic’s early days, the global financial crisis and 9-11 terror attacks on the US.
CommSec senior economist Ryan Felsman said the Aussie dollar was benefiting from a “perfect storm” for commodity exports.
“Being one of the biggest commodity producers and exporters on the planet means our incomes lift, and we could be considered a safe haven given our isolation with no direct threat of conflict,” he said.
KPMG chief economist Brendan Rynne said the US dollar usually strengthened against other currencies during crises because it was seen as a safe haven.
“The difference here is we are now getting price spikes in commodities that Australia produces and supplies overseas,” Dr Rynne said.
“The Australian dollar is a commodity-driven currency.”
The impact of Russia getting shut out of global markets helps Australia’s key commodity exports.
For example:
• Wheat prices have doubled in a year, and Australia is the world’s sixth-largest wheat exporter. Russia is No.1 and Ukraine is No.5.
• Russia is the world’s largest natural gas exporter, while Australia is tenth.
• Australia is the world’s largest iron ore exporter, while Ukraine and Russia both make the top 10.
• Australia is also the biggest coal exporter, with Russia the third-largest.
AMP chief economist Shane Oliver said “it does all come back to commodities”.
“Normally the Australian dollar goes down when there’s some sort of global crisis because it’s seen as threatening demand for commodities … this crisis has increased demand for commodities, which will in turn boost national income, and has pushed up the outlook for Australian interest rates,” he said.
“We are seeing massive rises for prices of oil, gas and coal, most metals have gone through the roof and even the iron ore price has gone up.
“Most soft commodities – foodstuffs – have gone up.
“These are all our big exports. We will pay more at the bowser but in terms of national income we will get a boost as our producers fill some of the gap left by Russia.”
Dr Oliver’s outlook for the dollar is positive: “We see it heading towards US80c or thereabouts.”
Westpac on Friday boosted its Australian dollar forecasts to US76c by the end of this year and US80c by the end of 2023.
Mr Felsman said the currency surge was “perverse, because the Australian dollar is normally a proxy for risk”.
When Covid first struck in
early 2020, the Aussie dollar dropped 17 per cent. It plunged 36 per cent during the GFC in 2008.
Mr Felsman said the dollar could dip within the next month to about US70c but Commonwealth Bank strategists expected it to lift to US80c by the end of 2022.
He said the Russian invasion had meant people had forgotten about rising Chinese demand lifting the iron ore price to a seven-month high. “There’s a strong correlation between iron ore and the Australian dollar,” he said. China had also increased demand for our coal and gas.
The Aussie dollar could weaken against the US next week when the US Federal Reserve is forecast to raise its official interest rate 0.25 percentage points, which will make the US dollar more attractive to hold.
“The Reserve Bank of Australia, in our view, is expected to lift interest rates from June,” Mr Felsman said.
Being one of the biggest commodity producers and exporters on the planet means our incomes lift, and we could be considered a safe haven given our isolation with no direct threat of conflict. Ryan Felsman