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Originally Posted by Whizgig
So why has our dollar gone down at all when its the US dollar that is in trouble not ours so ours should go up not down our economy is fine and getting stronger so Why???
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The reasons are varied and a little complex. However, bear with me and I
will attempt to explain.
Firstly it is important to appreciate that the Australian Dollar is floated,
which means it can be freely be bought and sold in exchange for other currencies.
One respondent incorrectly stated that -
Quote:
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the Keating Govt that revalued the AUD$ prior to that it held parity with the US$.
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In late 1983, the Hawke Government, of which Keating was the treasurer,
didn't "re-value" the dollar, they "floated" the dollar, a very important
distinction. From late 1974 up until then, the Australian Dollar was not
pegged to the US Dollar. Instead, it was pegged to what was known as
the "Trade Weighted Index", effectively a mixed bag of currencies
weighted in proportion to how much a country trades in goods and services.
As some respondents correctly pointed out, one of the reasons for the decline
in the Aussie Dollar in recent months is because it is generally linked by
currency traders to commodity prices - things like iron, coal, wheat, sugar,
etc. Australia is fortunate enough to be commodity rich. However,
in that regard it is viewed by currency dealers as being one big open cut mine.
When demand for resources drops, so does the value of the Australian
Dollar.
However, one of the biggest reasons for the decline of the Aussie Dollar, if
not the biggest, is what are called "carry trades".
Despite what they loved to boast about, the fact was that interest rates in
Australia during the Howard/Costello years were actually among the highest in
the developed world.
Enter the humble Japanese housewife. What could she possibly have to
do with the dramatic decline of the Australian Dollar?
The Japanese have some of the deepest pockets in the world, with savings
some analysts have estimated to be around US$15,000 billion.
After a period of stunning growth, from around late 1989 onwards,
the Japanese stock market and real estate asset bubble started to deflate.
Those were the days when one square meter of land in the Ginza
cost around US$1.5 million. As a deflationary spiral set in and the price
of real estate collapsed, the Japanese Central Bank set interest rates at
close to zero percent.
By then, many of Japan's technological exports, for which it was famous
and had grown prosperous on, started to decline. With the Nikkei stock market
index dropping from 1989 onwards, the Japanese started to look for
other places in the world to invest their money in which to get a higher rate of
return.
As many economic commentators have noted, in a Japanese household,
it is common for the housewife to control the purse strings and to make
investment strategies.
With official interest rates in Japan so low and during the Howard/Costello
era, official interest rates in Australia very high, Japanese housewives,
international hedge funds and other investors started trading in a risky
but potentially high yield venture called a "carry trade". Essentially you
go to a bank in Japan, take out your own savings and then borrow a whole
lot of extra Yen at say 0.5% interest. You then convert them into Australian
Dollars and invest them in, say, Australian bonds or even just a bank account
earning a much, much higher interest rate of return. For example, over the
past seven years they could earn something like 211% on their investments
in buying Australian Dollars. But the key thing is that in order to make these
investments, many had leveraged themselves by large amounts in taking
out the loans. The loans were easy to get because credit was freely available.
Then it all hits the fan. The US sub-prime crises sees credit start to become
tighter. Commodity prices drop and so does the Australian Dollar. Official
interest rates are cut here in order to stimulate the economy.
It then became time for all those carry trades to unravel their positions, selling
Australian Dollars as fast as they can and converting them back to Yen.
They know if they hold onto them, then what they will earn in interest here
minus exchange rate fees, etc. will be less than what they have to repay their
bank's back home in Japan for the loans.
So down goes the Aussie Dollar and up goes the Yen, to record highs.
How much money are we talking about? Funnily enough, nobody knows
for sure, but estimates of about US$500 billion in carry trades are not
uncommon. That is an enormous amount of money compared to the size
of the economies of most of the countries in the wold.
There are other reasons for the decline of the Aussie. Always keep in mind
that it is freely traded after all. However, despite what one might think,
"that there is no logic or reason for it to decline", then there very much is.
Is there any "fairness" in its decline compared to, say, the US Dollar?
Unfortunately, when markets are concerned, fairness does not enter into it.
Hope the above commentary may be of interest to some.
We wish you all the best for Christmas and the New Year!
The rise and fall of the Australian Dollar
