There’s been great interest surrounding the Australian economy – both on these shores and overseas – since a surge in value for the Aussie dollar. As July turned into August, the dollar shot beyond 80 US cents – almost 10 US cents higher than the rate last November and far higher than early 2016 and September 2015, when it dipped below 70 US cents.
Those sorts of figures are always going to spark interest in everyone from people trading in the forex markets to big businesses, politicians and academics – especially since the trend has been in evidence for a couple of months now. But what do they show? Do these figures hint at any underlying trends in the global economy?
The US is important
For some time now, global economies have been closely intertwined. Countries the size and scale of the US are more linked that others, and much can be explained by keeping a close eye on the fortunes of America.
The US dollar is suffering from something of a slump at the moment – becoming weaker against currencies right across the world. The value of the Australian dollar fits into that wider narrative.
The trend is being partly blamed on the performance of President Trump – who seems to be locked into a cycle of constant political crisis – and partly on a policy choice to make the US more competitive by embracing a weaker currency.
Kristina Hooper, the global market strategist at Invesco, said: “We’re going to see continued weakness in the dollar. It is very much a vote of confidence, or lack of confidence, in the U.S. economy.”
Iron ore is in demand
But we shouldn’t ignore other factors. Renewed demand for Australia’s raw commodities has also been a part of the dollar’s surge – and also shines a light on wider trends in the global economy.
The price of iron ore and coking coal, as ABC notes, is up by about 15 and 10 per cent respectively.
Much of this comes from strong demand in the world’s other leading economy – China.
Indeed, it’s tempting to look at the two factors together as evidence of the changing of the guard – with China overtaking or rivalling the US as the world’s economic superpower. That’s up for debate – but it’s certainly a long term trend in the global economy that experts and analysts will be keen to track.
Nothing is black and white
Yet, while the rising Australian dollar is good news for importers and the falling US dollar good news for people wanting to take a holiday in America, it’s also worth noting that every bit of financial news that creates a winner also creates losers.
Exporters cannot afford for their goods to become uncompetitive, while sluggish wage growth also risks creating an issue with inflation.
Indeed, when it comes to competitiveness, AiG found that 80 US cents is a ‘tipping point’. It found that 79 per cent of manufacturers were ‘very competitive’ if the Australian dollar was valued at 70-80 US cents. That figure falls to 38 per cent if it reaches 81-90.
The global economy is full of winners and losers – and no-one should ever be fooled into thinking that things are ever black and white.