Australian dollar boom could bust post-Covid economic recovery

The Australian dollar is at its highest level since June 2018, but what are the economic consequences?

The end-of-year elevated Australian dollar value comes after the currency’s nadir in March when it dropped to trade around US55c.

The Australian dollar is at its highest level since June 2018, clearing US76c on the back of surging global economic ­activity and a weaker US dollar.

The soaring currency comes on the back of iron ore prices nearing record highs after trading around $US170 a tonne, despite news that the BHP-Vale joint operation in Brazil that was shut down five years ago after a devastating tailings dam collapse has resumed production.

The booming local currency comes against the express wishes of the Reserve Bank of Australia and might threaten a broader post-pandemic economic recovery for the labour-intensive services and industrial sectors.

Some commentators have suggested the RBA might step up its efforts to bring the dollar down, after it committed to a $100bn bond-buying program earlier in the year to stop the upward drift of the currency.

RBA governor Philip Lowe, when speaking to the House of Representatives economics committee, noted the efforts the bank has made to restrain the dollar’s growth, but noted other central banks were engaged in similar efforts.

“In turn, this put downward pressure on the value of their currencies,” he said.

“As a result, here in Australia we found ourselves in the position of having relatively high longer-term bond yields compared with other countries, despite the short-term policy rate being similar across countries.”

ANZ Research currency analysts noted that despite recent highs, the “dollar price action looks stretched”.

“The dollar is increasingly vulnerable to a turn in global growth sentiment, but stretched price action alone is unlikely to be enough to stop its rise,” they said.

They noted that the New Zealand dollar was experiencing a similar good news rise.

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The end-of-year elevated Australian dollar value comes after the currency’s nadir in March when it dropped to trade around US55c.

The currency’s early-year collapse came as global sharemarkets tanked.

The resurgence of the dollar might signal a shift away from the US dollar safe haven for many international investors, according to AMP Capital chief economist Shane Oliver.

“The Aussie dollar has recovered dramatically from its low point in the COVID panic,” Dr Oliver said.

“It’s a cyclic currency: when things are uncertain it goes down and when there’s more optimism about global growth it goes up.”

Dr Oliver said the rise came amid a broader rally for commodities, with iron ore leading the way.

“It’s typically the case when the global economy is picking up, commodity prices go up,” he said. “The iron ore price is being given the added push along because of Chinese efforts to stimulate their economy.”

However, he noted the rise threatened efforts by the RBA to talk down the value of the dollar.

Dr Oliver said the RBA could look to boost its $100bn program.

“It could increase that program by printing more dollars or extending that program beyond April. I suspect it will probably end up extending it,” he said.

“They could intervene in the foreign exchange market to print more dollars and buy US dollars in the process of selling Australian dollars.

“But the evidence historically has been that intervention doesn’t have a lasting effect. It’s hard to see them doing that.”