The Aussie's tumble shows no sign of stopping.
TWENTY-THREE-YEAR-OLD STUDENT Matt Johnson worked in a Chicago video store all year to save US$2,500 spending money for his dream trip to Australia. With the air tickets paid in the States, he figured the cash would last him a month.
At the Sydney Olympics he saw athletics heats, diving and volleyball - and he partied day and night. After travelling to Adelaide and Perth, he flew home with nearly US$750 still in his billfold. "I cannot get over how cheap Australia is," says the young visitor, "a Big Mac works out less than we pay at home, some beers are half the price, and even the souvenirs are not a complete rip-off. I plan to come back next year and see the Barrier Reef."
Johnson was one of the hundreds of thousands of tourists who have benefited from the incredible shrinking Australian dollar, that has fallen over 20% against the greenback this year to under 55 cents, the lowest level since it was floated in 1985. The currency has been crumpled by the flight into US dollars that has also flattened the euro, hurt the pound, and pummelled most Asian currencies.
But that does not fully explain the extent of the collapse in the Australian dollar, which has tumbled from 80 cents since late 1996. Almost all the fundamentals should be supporting the currency.
The economy is cantering into its tenth successive year of 4%-plus expansion. Productivity gains have almost kept pace with the US for all of this period. Inflation is being contained at around 2.5%, despite big personal income tax cuts in July and the imposition of a goods and services tax. World prices for commodities like iron ore, copper and nickel are buoyant. The CRB index, which tracks 17 commodity futures markets converted into Australian dollars recently hit an all-time high and resource exports are running 27% up on last year. The current account deficit shrank to 4.9% of GDP in the June quarter, much better than the 6.2% in the same quarter last year.
Why then is the Australian dollar so weak? The Governor of the Reserve Bank of Australia (RBA), Ian Macfarlane, has confessed that, apart from the love affair with all things American, he doesn't have a clue.
The whole world is now extremely long of the US dollar. In the first half of this year foreign investors poured US$229 billion into US stocks and treasury bonds. Last year, the number was US$332 billion, and another US$276 billion was spent on snapping up factories, office blocks, shopping malls and Manhattan apartments.
The RBA has raised interest rates five times in a year to 6.25%, where they sit just below the Federal Reserve perch of 6.5%. But interest-rate differentials do not seem to be the problem. Any excuse is taken to dump the local dollar.
Because the Australian economy tracks its American counterpart so closely, the "Aussie", as foreign exchange dealers call it, used to be regarded as a dollar block currency, and moved accordingly. During the Asian crisis, traders perceived it as an Asian currency and they sold it down along with the yen and the Indonesian rupiah. When it became clear that Australia had sailed through the regional problems, the market decided, for unfathomable reasons, that the dollar should be tied to the hapless euro. This eccentricity reached its height the day after Danish housewives decided the country would not join the EU common currency. Speculators were fearful of short selling the euro in case the European Central Bank intervened in the market - so they sold the Australian dollar as a proxy for the euro.
Simon Crean, the shadow treasurer in Australia's opposition Labor Party, lowered the tone of the debate when he declared that the dollar had fallen against the Vietnamese dong, the Bangladeshi take, the Bulgarian leva, the Swaziland ligangeni and the Botswana pula. Crean neglected to point out that these currencies are only convertible at gunpoint.
Overseas visitors like Bill Gates and the ubiquitous economist David Hale, have labelled Australia a nation of technological troglodytes because it does not have an IT manufacturing base. It is true that the country does not boast a single Intel or an Apple. But it is one of the biggest users and consumers of technology in the world.
Ian Harper, Professor of International Finance at Melbourne University, believes the fact that Australia does not produce much in the way of high-tech kit is irrelevant, and might actually be an advantage. He says the profit margins from IT intensive goods and services are wafer thin and are continually being competed down. "It is the consumer who is going to pick up the gain from this, and that's us. We are using these services to transform industries," says Harper, who is a former senior official at the Reserve Bank.
The level of the Aussie is bad news for importers and Australians wanting to go overseas. But it's a boon for the inbound tourist industry, which will host 5 million visitors this year and expects a post-Olympics boost for years to come. Exporters are having a field day, as are companies with big overseas earnings.
While the Aussie is now palpably undervalued, there will be no sustained bounce until the US dollar begins to decline. Here are three reasons why that might happen: the unsustainable US trade deficit; the US election with neither of the combatants enjoying much confidence abroad; and the effect of the slowing economy.