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Mon, Oct 15, 2007 - Page 10 News List

Canberra concerned about rising 'Aussie'

COMPETITIVENESSEconomists have warned that the farm sector could suffer as the Australian dollar nears parity with the greenback and economic growth could slow


The Australian dollar has rocketed to 23-year highs against the US currency and could slow the country's economic growth as it pushes towards parity with the greenback, economists say.

The rise of the Aussie on the back of booming resource demand from China has accelerated amid mixed signals about the strength of the US economy and a widening interest rate differential between Australia and the US.

The Australian dollar averaged around US$0.78 last year -- but has risen by more than US$0.10 in recent months, ending last week at US$0.89.73.

While the surging currency has been a boon for Australian consumers snapping up cheaper imports, analysts say it will force businesses to increase their competitiveness if they want to maintain an edge in export markets.

Overall growth could slow and the farming sector, already struggling with the worst drought in living memory, would be particularly hard hit, economists say.

"A 1 percent appreciation of the Australian dollar equates to a reduction of farm incomes of approximately 190 million," National Farmers Federation economic manager Charles McElhone said.

He estimated Australian farmers would lose A$3 billion if the Australian currency reached parity with its US counterpart for the first time since July 1982.

Commonwealth Bank chief currency strategist Richard Grace said that scenario was set to become reality in the next six months.

"There is significant upside to the Australian dollar," he said.

"It has become clear that the world economy is not going to be significantly dented by the credit crisis, and the US economy has also been proven to be stronger than people thought it was," he said.

Australian Treasurer Peter Costello said last week that, in practical terms, the Australian dollar was at its highest level since it was floated in 1983.

"This really represents a record level for the Australian currency. From an economic point of view this does bring difficulties and it makes things tougher for our exporters and to that degree is a constraint on growth," Costello said.

He said imports were cheaper because of the surging currency but "what we'd really like is our exports to be more competitive."

Australian Industry Group chief executive Heather Ridout said the currency's strength was hitting exporters by making their goods more expensive for customers in overseas markets.

"If it is sustained at these levels, they will have to lift the competitiveness of their business quite profoundly," Ridout said.

"These are very big changes in the price levels of their products that they have to address either out of profit margins or out of higher competitiveness," she said.

Costello said there were some positives to the Aussie's rise as it helped offset increases in the international oil price -- an outcome that contributes to keeping inflation in check, decreasing the chance of an interest rate rise.

"One of the good things about having a strong currency is that it is shielding us to some degree against oil price rises, so oil and petrol would be higher if the currency wasn't as strong as it currently is," he said.

"But all things considered, a strong currency ... is not all that good for your economy," he said. "To be in this range brings with it a lot of problems."

Jobs data released last week showed unemployment was at a 33-year low of 4.2 percent, prompting fears the central bank could lift interest rates to keep inflation under control. Such an outcome would be potentially disastrous for Costello, whose government faces an election later this year that will be decided in mortgage-belt seats.

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