Since the Australian dollar replaced the pound in 1966, it has had more ups and downs that a rollercoaster.  In 1968 the Australian dollar was linked to the US dollar at an official rate of $1.00 AUD to $1.12 USD.  Since then, the Australian dollar has never matched or exceeded the USD.  Back in 2001, it hit its lowest ever value of only 48 US cents.  Then in July 2008 its value increased to 98.04 US cents, an increase of almost 100% since 2001 and it’s highest rate in 24 years.  Recently it has gone as high as 97.51 US cents.

Source:  XE.com  (6th October 2010)

What has caused the increase in the value of the Australian dollar against the US dollar?

The basic reason for the recent increase in the value of the Australian dollar against the US dollar is the weakness of the US economy, combined with a strong Australian economy.  In addition, the US and Australia have followed opposing economic policies.  In the USA, the Federal Reserve Bank has focused on keeping interest rates low.  In Australia, our Reserve Bank has made curbing inflation a priority so interest rates have increased numerous times since 2001.  With the current uncertainty over whether the RBA will increase interest rates at their next board meeting, this is likely to be holding the Australian dollar at its current level of around 96 US cents.

The other factor which is keeping the Australian dollar so high is our good balance of trade figures.  Once Australia lived off the sheep’s back, but these days we live off the miner’s shovel.  As China and other major trading partners drive demand for our mineral resources, this too increases the demand for our currency.

How do fluctuations in the Australian dollar affect me?

Theoretically, we should be paying less for imported goods right now as they are being paid for with a stronger dollar.  In practice though, importers don’t always pass on the savings, many of which have been eroded by higher crude oil and transport costs.  We can at least be thankful that we are paying for our crude oil imports with a strong dollar – if the Aussie dollar was still worth 49 US cents the cost of petrol would be double what it is today!  Of course our strong dollar also makes this a great time to be vacationing in the USA, however every coin has two sides.  Our strong dollar makes it a tough time for our American friends to visit us – a factor that has already impacted on the Australian tourist industry.

A high Australian dollar also affects Australian exports to other countries.  Demand for our mineral resources remains strong but all the other products and services Australia sells overseas are also affected.  These goods now cost more and overseas buyers may purchase less for this reason.  At the same time, imports are cheaper and this could encourage demand thereby increasing inflation.  Both of these scenarios could cause downward pressure on our balance of trade figures.

There’s a lot of speculation at the moment just how high the Australian dollar with climb against the US dollar.  Some experts believe that parity is on the cards, with others even forecasting up to $1.20.  It will be interesting to see just what the future holds!

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