Mon, Oct 11, 2010 - Page 11 News List

Australia frets about currency

DOWNSIDE OF STRENGTH:The strong Aussie dollar could pose challenges for some sectors, particularly manufacturing, tourism and companies with offshore operations

AFP, SYDNEY

The surging Australian dollar, which analysts say is set for a sustained period at or above recent record highs, could cut into national revenues as exports suffer, Australian Treasurer Wayne Swan warned yesterday.

The Australian dollar is rocketing on the back of an unprecedented mining boom, a strong local economy and exposure to China’s growth, zooming up against the US dollar last week to hit a record of US$0.9918 on Thursday.

The record — the Australian currency’s highest level since it was floated in December 1983 — prompted suggestions that the local dollar would tip past parity with the greenback by the end of the year.

Swan said the high Aussie -reflected the economy’s underlying strength amid a fragile global situation.

However, speaking to ABC TV, he admitted that reaching parity would be a bittersweet milestone for Australia and would pose challenges for some industries such as manufacturing, tourism and agriculture.

“Many people, for example, who are buying imported goods would be pleased that they’re cheaper, but many others, particularly in manufacturing, and also in tourism, would certainly feel the effects of a higher dollar,” he said.

“There may be some impacts on the downside for revenue,” Swan added.

“We’ll just have to wait and see as we prepare the budget what the overall net impact of that is,” he said from Washington. “There’s no doubt that a high dollar will impact on company profitability.”

Analysts say the case for a rising Aussie is supported by surging demand for Australian minerals, particularly from Asia, and the central bank’s likely lifting of interest rates from the current 4.5 percent again this year.

“It’s quite easy to see the currency potentially moving up to parity and then through that level,” Westpac currency strategist Jonathan Cavenagh said.

Westpac sees the Aussie reaching US$1.02 by year-end, but Cavenagh said he would be surprised if it does not reach this level earlier.

“It could really get there in a couple of sessions if things really got a wriggle on,” he said, adding that the dollar would likely reach around US$1.05 next year.

AMP Capital Investors chief economist Shane Oliver forecasts the currency, which has soared more than 20 percent since June, will reach US$1.10 next year.

While US$1.00 is “just a round number, a line in the sand,” the previous norm of the Aussie sitting in a range of US$0.70 to US$0.80 seems to be over with the currency trending higher on a more sustained basis, he said.

Oliver said that while this will cause some headaches for manufacturers, the tourism sector and companies with offshore operations, it takes the pressure off inflation and this could potentially put interest rate rises on hold.

As global friction mounts around the Chinese yuan, with US and European leaders complaining that China is cheating on its exchange rate, economists say it is probably better for Australia to have a strong currency than a weak one.

“The rising currency is a positive in terms of putting dampening inflation pressure on the economy where inflation has been expected to pick up to the top of the Reserve Bank of Australia’s [RBA] target band of 3.0 percent over the coming year,” UBS economist George Tharenou said. “The rise in the currency is a tightening of financial conditions and therefore it does some of the policy work for the RBA.”

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