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Dipping Aussie dollar in good company

HOW quickly things can change. In calendar year 1999, the Australian dollar was the third strongest in the world. In that year, it rose 6.2 per cent against the greenback.

Last year was a very different one for the Aussie. It weakened 18 per cent against the US dollar. In this year, 2001, the Aussie has fallen by 8.8 per cent. Of the 132 currencies that are monitored by Craig James and his crew at CommSec Research, the Australian dollar has had the 24th largest decline against the US dollar over this year.

If it is any comfort to us here, only 14 of the currencies have appreciated against the US dollar this year. In the year 2000, only seven currencies rose against the US dollar.

Almost all the major currencies have weakened against the US this year, with the Canadian dollar down 6.5 per cent, the Japanese yen down 6.3 per cent, the New Zealand dollar down 6.2 per cent, the euro down 2.9 per cent and the British pound down 1.9 per cent.

This highlights the fact that the greenback has been incredibly resilient. Against all currencies it continues to perform very well despite the shocks inflicted on the American economic system.

Even before the events of September 11 the US economy was going into a recession. This recessionary environment has since been confirmed with latest GDP growth figures showing that last quarter the world’s largest economy declined for the first time since the 1990s. Add to that the decline in consumer and business confidence as a result of the attacks, the decline in airline travel and the impact on insurance companies of the claims to arise, and that would amount to a shock that would have most other economies reeling.

But the US dollar remains strong.

This process defies logic. Here is an economy that has tipped over into recession. This is an economy that is undertaking massive cuts in interest rates in order to prop itself up. This is an economy that is being crippled by such things as anthrax scares and requires some major pump priming by Congress in order to ensure that the recession is not a prolonged one. So why are traders still buying the American dollar?

Let us try and apply some logic to economics. This is a dangerous thing to do at the best of times, but applying all the logic that we have been taught says that this, the world’s largest economy, will go into a recession with some bite.

The spending on the war effort, combined with all of the other issues raised above, would keep this economy in recession.

The one factor that has not been taken into account above is the role of the Federal Reserve and Congress in the pump priming activities.

The Federal Reserve has been ruthless in its interest rate cuts. Alan Greenspan has been relentless in his fervour in cutting rates and jawboning the US traders into believing that he will be able to ensure the recession will not be one of any substantial length.

The other issue relates to Congress and its tax cuts and increased spending. President Bush would have us believe that the increased spending and increased availability of money to American consumers will cause them to rethink their priorities and change their confidence to such an extent that they will go out and spend.

You would have to say that this is an issue that is going to rest on the balance of probabilities. Depending on your perspective, you could lean towards the economic powers of Greenspan and Bush or you could lean to the efficiency of markets and the logic of traders. From my position, I lean towards the traders. In my view the recovery in the American stock market is overdone and there is a strong likelihood of a further leg down in this cycle.

Traders on the market who are counting on a short and sharp recession with a quick recovery would have to recognise the possibility that this will be something more than that.

A lot will depend on the length of the “enduring war on terrorism” and its ultimate cost. We await the future to assess the impact of this whole issue.

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