The Australian dollar is flirting with parity with its US counterpart for the first time, buoyed by Australia's mineral wealth and its connections to the Asian boom
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- The Observer, Sunday 17 October 2010
- Article history
A US one-dollar bill below an Australian 10-dollar and 20-dollar bill. Photograph: Jason Reed/Reuters
Bad news for Antipodean-bound cricket fans heading to the Ashes next month. There's a big, bad currency beast on the loose: the Australian dollar. Buoyed by high interest rates and rampant commodity prices, the "Aussie" has rocketed to an all-time high and is on the brink of parity with the US greenback.
The Australian dollar, once disparaged as the "Pacific peso", touched 99.82 •••CHECK US cents this week – its highest level since it was unleashed to float freely in 1983. In the foreign exchange markets, the pound buys just A$1.60, compared to more than A$2 in the summer of last year.
The Aussie's renaissance over the last three months has eclipsed the performance of other fancied currencies including the Japanese yen, the Swiss franc and the Canadian dollar. Its surge was hailed by Australia's finance minister, Penny Wong, as a vote of confidence in the Australian economy – although a steady stream of Australian exporters have warned that their overseas profits are dwindling.
Daniel McCormack, a London-based economist for the Australian bank Macquarie, said the country's rich reserves of coal and iron ore, together with economic growth in its Chinese and east Asian trading partners, had turned the land of plenty into a financial safe haven.
"The Australian economy is strong and it's been fairly well managed," says McCormack. "But the main reasons the Australian dollar is doing so well are commodity prices, plus the strength of China and the rest of Asia."
Australia was one of the few developed countries to avoid a recession during the global financial crisis. Firm fundamentals have allowed the Reserve Bank of Australia to set interest rates at 4.5% – far higher than Britain's 0.5% or America's 0.25% – in a further lure for global flows of capital.
Four years ago, some 30,000 British sports fans travelled to Australia to watch England endure a five-nil drubbing in the Ashes. As England's cricketers prepare for a fresh tour, the cost of travel is soaring. David Swann, a currency strategist at Travelex, says that, at a typical bureau de change, a holidaymaker exchanging £500 would have got A$1,250 at the start of the last Ashes season down under, compared with just A$805 today.
"That's a really significant shift," says Swann, who points to talk of further quantitative easing both in Britain and the US as a reason for capital to slip to other corners of the world. "The US has come out and said it's going to extend its quantitative easing programme. That sends a message to people in the US that the US economy is in trouble and that they should go elsewhere."
The Aussie is not the only currency flirting with parity against the greenback. Canada's dollar – known as the "loonie" after the bird depicted on the C$1 coin – is worth US$1.0036••CHECK and has been within cents of its US counterpart all year. These second-tier currencies are often overlooked in the battle surrounding the yen, the euro and the yuan.
For exporters, such sharp shifts are a significant headache. CSL, an Australian biotechnology company specialising in vaccines and treatments for blood disorders, warned at its annual meeting this week that the strength of the national currency could slice as much as A$100m out of its profits this year. The Australian airline Qantas has reported higher outbound traffic, but empty seats on flights coming into Australia.
According to the Australian tourist office, some 649,400 people travelled from the UK to Australia in the year to July – a drop of 1%, blamed largely on disruption caused by Iceland's volcanic ash cloud rather than by currency exchange. But fears are growing of a fall-off in foreign visitors – the Australian Broadcasting Corporation reported that crowds were "thin" at Sydney's Darling Harbour on a weekday lunchtime this week.
One Perth-based adventure tour operator, Easyrider, ceased operations this month, blaming the soaring currency for a critical shortage of British and Irish backpackers. Owner Chris Cronin told the ABC that the number of people booking tours had fallen from 16 per bus to six or eight: "There are a lot more people out there that are really going to suffer because of the strength of the Australian dollar at the moment," he said.
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The Australian dollar, once disparaged as the "Pacific peso", touched 99.82 •••CHECK US cents this week – its highest level since it was unleashed to float freely in 1983. In the foreign exchange markets, the pound buys just A$1.60, compared to more than A$2 in the summer of last year.
The Aussie's renaissance over the last three months has eclipsed the performance of other fancied currencies including the Japanese yen, the Swiss franc and the Canadian dollar. Its surge was hailed by Australia's finance minister, Penny Wong, as a vote of confidence in the Australian economy – although a steady stream of Australian exporters have warned that their overseas profits are dwindling.
Daniel McCormack, a London-based economist for the Australian bank Macquarie, said the country's rich reserves of coal and iron ore, together with economic growth in its Chinese and east Asian trading partners, had turned the land of plenty into a financial safe haven.
"The Australian economy is strong and it's been fairly well managed," says McCormack. "But the main reasons the Australian dollar is doing so well are commodity prices, plus the strength of China and the rest of Asia."
Australia was one of the few developed countries to avoid a recession during the global financial crisis. Firm fundamentals have allowed the Reserve Bank of Australia to set interest rates at 4.5% – far higher than Britain's 0.5% or America's 0.25% – in a further lure for global flows of capital.
Four years ago, some 30,000 British sports fans travelled to Australia to watch England endure a five-nil drubbing in the Ashes. As England's cricketers prepare for a fresh tour, the cost of travel is soaring. David Swann, a currency strategist at Travelex, says that, at a typical bureau de change, a holidaymaker exchanging £500 would have got A$1,250 at the start of the last Ashes season down under, compared with just A$805 today.
"That's a really significant shift," says Swann, who points to talk of further quantitative easing both in Britain and the US as a reason for capital to slip to other corners of the world. "The US has come out and said it's going to extend its quantitative easing programme. That sends a message to people in the US that the US economy is in trouble and that they should go elsewhere."
The Aussie is not the only currency flirting with parity against the greenback. Canada's dollar – known as the "loonie" after the bird depicted on the C$1 coin – is worth US$1.0036••CHECK and has been within cents of its US counterpart all year. These second-tier currencies are often overlooked in the battle surrounding the yen, the euro and the yuan.
For exporters, such sharp shifts are a significant headache. CSL, an Australian biotechnology company specialising in vaccines and treatments for blood disorders, warned at its annual meeting this week that the strength of the national currency could slice as much as A$100m out of its profits this year. The Australian airline Qantas has reported higher outbound traffic, but empty seats on flights coming into Australia.
According to the Australian tourist office, some 649,400 people travelled from the UK to Australia in the year to July – a drop of 1%, blamed largely on disruption caused by Iceland's volcanic ash cloud rather than by currency exchange. But fears are growing of a fall-off in foreign visitors – the Australian Broadcasting Corporation reported that crowds were "thin" at Sydney's Darling Harbour on a weekday lunchtime this week.
One Perth-based adventure tour operator, Easyrider, ceased operations this month, blaming the soaring currency for a critical shortage of British and Irish backpackers. Owner Chris Cronin told the ABC that the number of people booking tours had fallen from 16 per bus to six or eight: "There are a lot more people out there that are really going to suffer because of the strength of the Australian dollar at the moment," he said.
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