Australian dollar has found renewed global support, so how high could it go?


July 18, 2017 11:05:58

Many see the dollar as a proxy for the strength of the Australian economy.

For example, when it hit parity with the US dollar in November 2010, financial dealing rooms around the country threw “parity parties”.

There are practical benefits of a higher currency too.

If a lot of your business costs are generated offshore, then a higher dollar would normally reduce those costs.

A strong currency can also make imported consumer goods cheaper — great if you’ve been eyeing a big screen TV from overseas.

Alternatively, if a country’s economy is lagging because of a weak exports sector, a lower dollar may be needed.

It makes that country’s goods more internationally competitive and can help to lift economic growth.

So, why is the Australian dollar rising, and can it push even higher from its current levels?

You can get a bigger bang for your buck Down Under

A key reason why the Australian dollar is rising against the greenback is due to what is called the yield on offer.

For example, if an international bond investor looks at a 10-year Australian government bond, they would see it currently returns roughly 2.7 per cent.

The same investor could then look at a US government bond and see it is worth 2.3 per cent.

Even if you’re no mathematician, you can see the Australian government bond is more attractive.

The thing is, in order to buy an Australian government bond, you need to buy Australian dollars.

So, the more investors seek Australian government bonds, the higher the Australian dollar goes.

It works the same way for bank interest rates. The dollar will often rise after the Reserve Bank increases interest rates, because investors looking for a higher yield then turn to Australia.

We’ve golden soil

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