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The golden currency

SINCE the 1970s – some would say the late 60s – the US dollar has risen above gold as a fiduciary standard to become the currency others are measured by.

The Greenback was even recently adopted as the currency for a struggling South American nation.

Since 1997 several central banks, including the Reserve Bank of Australia, have been reducing their gold holdings.

This caused gold to drop from almost US$400 an ounce to around US$270, while boosting the Greenback’s prestige.

However, how long can the US dollar keep its power?

Some argue the strength of the US dollar is due to the work of Frank Sinatra, Elvis Presley, John Wayne, Marilyn Monroe, Frank Lloyd Wright and James Dean who led American culture’s global push during the 1950s and 60s.

Chamber of Commerce and Industry senior economist Dan Engles believes the US economy’s size is one of the main reasons for the currency’s success.

It could also be its downfall.

“The US is the world’s largest economy. It has a stable government and all the positive economic factors that go with that,” Mr Engles said.

“It has unemployment down to the lowest level since President Richard Nixon retired.

“Unemployment is down to 4.5 per cent so you would expect to start getting skill shortages soon. Labour costs will start pushing up which is an inflationary pressure.

“Economic growth in the US has been running around 5 per cent. Normally it is around 2.5 per cent.”

Mr Engles said despite these inflationary clouds, the US still attracted a lot of capital.

“The US is the flavour of the month. Its information technology and new technology sectors are all the rage,” he said.

“Financial markets are being swayed by fashion cycles.”

BankWest senior economist Alan Langford said the psychological power of the US dollar should not be underestimated.

“The US dollar has always been a deeply traded currency,” Mr Langford said.

“It was probably the first one to break away from the gold standard.”

In theory, the Euro should have threatened the US dollar for supremacy as it represents a population equal in size and affluence to the US.

However, the Euro also represents 12 very separate economies.

To make matters worse for the Australian dollar, it seems tied to the Euro in currency traders’ minds.

Mr Langford said although the Euro had steadily lost value since its launch this might not always be the case.

“It’s the new economy, old economy dichotomy,” he said.

“There is a feeling the European economies are the height of the old economy and that perhaps their labour markets are not flexible enough to adapt to the new economy.”

Sweden and Denmark, two countries leading in new technologies, are suffering a similar currency plunge to the Australian dollar.

Mr Langford said the theory that Australia’s currency woes were due to its cash rate differential with the US did not add up.

“Why is the Yen so strong when the official cash rate of Japan is just 1.5 per cent?” he asked.

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