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The nude US dollar runs for cover

THE Australian dollar has become an expedient Aunt Sally for irresponsible politicians, but the “big dollar”, as foreign exchange dealers call the greenback, is suddenly looking a little vulnerable.

The man to watch is the new US Treasury secretary, Paul O’Neill. A former chief executive of aluminium giant Alcoa, O’Neill is thought to be a closet fancier of a softer US dollar. He might be wondering if the muscular dollar at-all-costs strategy might have passed its use-by date.

Economists at HSBC are in no doubt. They said in a recent research note: “The strong dollar policy has no clothes.”

Weakening US consumption growth, business investment falling off a cliff amid a thicket of profit warnings and rising unemployment do not add up to inflation as a pressing worry.

Throw in the billion-dollar-a-day trade deficit, which has ballooned to an unprecedented 4.6 per cent of GDP and it is clear that the US economy is increasingly on the nose. The threatened bankruptcy of electricity utilities in California emphasises the point.

Falling interest rates, the imploding Nasdaq market, and tumbling company profits provide little rationale for needing a super-strong currency. Yet the dollar stands at a trade-weighted 15-year high.

Capital flows are still heading resolutely towards Manhattan because the US is still perceived as a safe haven in times of stress. As somebody put it recently, that might be like rowing towards the Titanic.

But alternative destinations are few. The Japanese change their prime minister every wash day. The Bank of Japan governor Masaru Hayami has just promised he will crank up the printing press, in a last throw of the dice to keep the world’s second biggest economy out of the graveyard. The yen has fallen through 126 to the dollar.

You can be sure that Paul O’Neill’s pals in the industrial heartland have got in his ear with a plea to persuade Bush that this is a good time to let the dollar take a snooze to help exporters.

Some commentators forget that massive currency shifts are the norm rather than the exception. It was in October 1994 that the yen hit a 50-year high of 95 against the dollar. Some of Bill Clinton’s advisers persuaded him early in his first term that it would be a super wheeze to use a weak greenback as a bargaining chip to force Japan to cut its trade surplus.

That turned out to be a very bad idea. The dominant investment theme became avoiding any dollar-denominated assets.

The White House switched to a view that a strong currency was needed to tame inflation, increase American living standards, and promote investment. But that was then. This is now.

HSBC believes a big chunk of the US current account deficit needs to be transferred to Europe through a major realignment with the Euro.

Such an outcome could give the Australian dollar a boost from its current oversold US49 cents to something closer to 60 cents in 2002 – by then, the one and a half percentage points the RBA has sliced off interest rates will have delivered growth in the domestic economy. In the meantime, we need to ignore crackpot advice from the likes of ASX chairman Maurice Newman that we should adopt the greenback as our currency.



…and for our next piece

Shareholders who rocked up to the Burswood Theatre to vote on proposals which folded the venerable Westralian Farmers Cooperative and the Franked Income Fund into restructured Wesfarmers were entertained before the meeting by a string quintet from the UWA music department.

The business proceedings were equally well orchestrated, with 10 sets of resolutions conducted in time for a canapés and coffee spread for a very contented bunch of investors. Wesfarmers is now a $5.8 billion diversified group, ranked the 24th biggest listed company in Australia. It has been the No.1 performer over the past 17 years, growing in value at an average 30 per cent compound a year.

Presumably, Wesfarmers chief, Michael Chaney, has something in mind for an encore. At $20.70 his shares represent nothing less than super currency for acquisitions. He promised cockies in the audience the company had a number of ideas to keep the agriculture unit moving forward.

Rural group Futuris, saw its share price gallop to a high of $1.25 last week, capitalising the company at $1.5 billion.

One way Futuris boss Alan Newman might catch up a little would be to provide entertainment at his next AGM.

Elders is about to spin off 386,000 head of cattle into a separate quoted company.

Old videos of Wagon Train are a thought, backed up by Country and Western music. Anyone checked Slim Dusty’s diary?

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