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All dollar roads lead to Manhattan

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All dollar roads lead to Manhattan



THE Australian dollar has been arrested as a vagrant for being unable to show any visible means of support. But it is not alone in the paddy wagon.

The pound has slumped to a seven-year low of 1.4380 against the greenback, the Swiss franc is at an 11-year low, and you can hardly give the euro away. Among South East Asian currencies the Singapore dollar is under pressure, and both the rupiah and the peso have fallen off the perch.

The yen has been holding on grimly, although the ever-helpful Moody’s agency cut Japan’s domestic currency rating last week.

What we have here is another potential global currency crisis. And it is one that is particularly difficult for Australians to understand.

This time last year, the Aussie was trading at US65¢ and all the experts said it was cheap.

“Buy on any weakness,” declared David Monzina, of Merill Lynch. He believed the inflation track record of the RBA, rising productivity and solid GDP growth, suggested the Australian dollar “could mimic the strong performance of the US dollar in recent years”.

Deutsche Bank predicted a level of US74¢. The man from Goldman Sachs thought that was wussy and tipped the dollar as “one of the trades of 2000” headed towards US77¢.

They were all wrong by a country mile. Why? Did the Australian economy go pear-shaped? No, it is cantering into its 10th year of expansion.

Perhaps commodity prices disappointed? No. The CRB index, which tracks 17 US commodity futures markets converted into Australian dollars, has hit an all-time high, and resource exports are running 27 per cent up.

Did the trade gap blow out? Not really, the current account deficit beat expectations in the June quarter by shrinking to $7.8 billion, or 4.2 per cent of GDP, down from 6.2 per cent in the same quarter last year. But nobody noticed.

Australia did not cause the currency problem and it cannot cure it. The trouble is that investment flows these day are more important than trade flows. There has been a lemming-like rush into US dollar denominated assets and out of anything that does not look like a dollar.

In three months to June 30, foreigners poured US$106 billion into American securities. US 10-year bonds have returned 13 per cent this year, miles better than earnings on treasury paper in any other major financial centre.

The money flow was tracking a surging US economy that expanded six per cent in the first half of 2000. It has kept on coming, and got another boost with the news that productivity gains were running at 5.7 per cent. All roads lead to Manhattan.

Commentators, casting around for the reason why the Australian dollar has been all but abandoned recently, say it is because everything we make and sell here is old hat, and we have been left out of the brave new world of technology. Possibly so. But is that a good enough reason for revisiting 1983 levels of US55¢?

One sensible comment has come from top Deutsche Bank analyst in Europe Paul Meggyesei. He says the latest round of dollar bashing is due to a “lack of clarity,” because current economic data is hopelessly distorted by the GST and the Olympics.

If Australians are puzzled by the combination of slumping retail sales and building starts, brisk job creation and an export boom, together with predictions of an interest rate induced recession, we can hardly blame people overseas for being confused.

The pound has slumped to a seven-year low of 1.4380 against the greenback, the Swiss franc is at an 11-year low, and you can hardly give the euro away. Among South East Asian currencies the Singapore dollar is under pressure, and both the rupiah and the peso have fallen off the perch.

The yen has been holding on grimly, although the ever-helpful Moody’s agency cut Japan’s domestic currency rating last week.

What we have here is another potential global currency crisis. And it is one that is particularly difficult for Australians to understand.

This time last year, the Aussie was trading at US65¢ and all the experts said it was cheap.

“Buy on any weakness,” declared David Monzina, of Merill Lynch. He believed the inflation track record of the RBA, rising productivity and solid GDP growth, suggested the Australian dollar “could mimic the strong performance of the US dollar in recent years”.

Deutsche Bank predicted a level of US74¢. The man from Goldman Sachs thought that was wussy and tipped the dollar as “one of the trades of 2000” headed towards US77¢.

They were all wrong by a country mile. Why? Did the Australian economy go pear-shaped? No, it is cantering into its 10th year of expansion.

Perhaps commodity prices disappointed? No. The CRB index, which tracks 17 US commodity futures markets converted into Australian dollars, has hit an all-time high, and resource exports are running 27 per cent up.

Did the trade gap blow out? Not really, the current account deficit beat expectations in the June quarter by shrinking to $7.8 billion, or 4.2 per cent of GDP, down from 6.2 per cent in the same quarter last year. But nobody noticed.

Australia did not cause the currency problem and it cannot cure it. The trouble is that investment flows these day are more important than trade flows. There has been a lemming-like rush into US dollar denominated assets and out of anything that does not look like a dollar.

In three months to June 30, foreigners poured US$106 billion into American securities. US 10-year bonds have returned 13 per cent this year, miles better than earnings on treasury paper in any other major financial centre.

The money flow was tracking a surging US economy that expanded six per cent in the first half of 2000. It has kept on coming, and got another boost with the news that productivity gains were running at 5.7 per cent. All roads lead to Manhattan.

Commentators, casting around for the reason why the Australian dollar has been all but abandoned recently, say it is because everything we make and sell here is old hat, and we have been left out of the brave new world of technology. Possibly so. But is that a good enough reason for revisiting 1983 levels of US55¢?

One sensible comment has come from top Deutsche Bank analyst in Europe Paul Meggyesei. He says the latest round of dollar bashing is due to a “lack of clarity,” because current economic data is hopelessly distorted by the GST and the Olympics.

If Australians are puzzled by the combination of slumping retail sales and building starts, brisk job creation and an export boom, together with predictions of an interest rate induced recession, we can hardly blame people overseas for being confused.

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