White-knuckle ride for Australian dollar

By Phil Mercer
BBC News, Sydney

The weaker dollar will make it more expensive for Australians to go abroad.

The global economic meltdown has sent the Australian dollar, one of the world's most traded currencies, on a white-knuckle ride.

In recent weeks the "Aussie" has experienced the bumps and bounces of a turbulent market.

It plummeted mightily against the US dollar, before fighting back and regaining some lost ground.

"The Australian dollar has been on a roller coaster ride," says Matthew Smith from the University of Sydney.

"From the end of September until its low point on 28 October it depreciated against the US dollar by a massive 37%."

Freefall

It has also fallen against the yen and European currencies.

The freefall has been arrested in part by the intervention by the Reserve Bank of Australia and the local dollar has edged its way upwards, slowly recovering by more than 10% since early November.

The dramatic fall in the Australian dollar probably ruined everyone's thoughts about going overseas on holiday Paul Clitheroe, finance expert

Now worth around 67 US cents, it is still well down on previous highs when it approached parity with its American cousin earlier this year.

The battling Aussie is regarded as a commodity currency, one that is indelibly linked to Australia's trade in resources, particularly iron ore and coal.

As demand for these products falters, along with prices, downward pressure is exerted on the Australian dollar.

Tony Morriss, senior currency strategist at financial services firm ANZ, says a combination of economic factors has conspired to haul the struggling unit lower.

"The Australian dollar previously benefitted from high interest rates, surging commodity prices due to exposure to China's booming growth, strong domestic growth and a weak US dollar. All of those factors have now gone into reverse," he told the BBC.

Since the middle of this year, other commodities-driven currencies including the South African rand and the Brazilian real have been jettisoned by traders amid fears of a worldwide recession.

Winners and losers

So where do these volatile exchange rate fluctuations leave the Australian economy and who are the winners and losers?

It will provide some relief to domestic manufacturing industries that have struggled to compete under a strong dollar Matthew Smith, University of Sydney

Australians travelling abroad to the US or Japan, for example, have seen the relative value of their spending money diminish.

"The dramatic fall in the Australian dollar probably ruined everyone's thoughts about going overseas on holiday," said finance expert Paul Clitheroe.

"But the simple reality is that as an exporting nation, our exports become significantly cheaper."

Foreign tourists visiting Australia will see their hard-earned cash go further.

And exporters would normally expect to cash in while the dollar is weak, although their hopes could be dented by sluggish international demand for their goods and services caused by the global slowdown.

Relief

As the domestic currency tumbles, items imported into Australia become more expensive.

"It will provide some relief to domestic manufacturing industries that have struggled to compete under a strong dollar," says Dr Smith.

"On the losing side of the depreciation will be importers in general and consumers of imported goods, especially durable household products (fridges etc)."

A weaker dollar could help protect Australia from the worst effects of a global slump as more exports stimulate growth.

"The Australian dollar is a shock absorber for Australia's economy," says Bob Cuneen, a senior economist at AMP Capital Investors.

"When the global economy goes through a downturn, the Australian dollar typically weakens and this insulates the domestic economy against that global weakness."

Where next?

Where the shell-shocked Aussie goes from here is the subject of much talk.

While some doomsayers believe it could dive to 40 US cents, optimistic analysts say the currency is undervalued and should bounce back by Christmas to around 75 US cents as commodity prices recover along with renewed confidence in financial markets.

It promises to be an unpredictable ride.