There are “hard money” countries such as Switzerland that put currency stability pretty much above all else, and “soft money” nations, the United States being one example, that give top priority to jobs and living standards and don’t fuss too much about monetary values, and certainly don’t get worked up about the exchange rate.
In recent months, Australia has been pretty firmly in the second category. But its membership of this club is complicated by the realities of the Australian economy. More on that in a moment.
Cross-fire of trade war
The Reserve Bank of Australia has maintained rock-bottom interest rates of the sort that became common during the financial crisis despite monetary tightening in the US, the euro-zone and the UK. This has made Australian assets comparatively less attractive, and investors have reacted accordingly.
As the gap between Australian rates and those available elsewhere widened, the took a serious tumble, losing about 10% of its value during the year to date.
Investors and traders took fright also at the prospect of Australia being caught in the cross-fire of a US-China trade war. China is Australia’s largest trading partner.
Commodities cloud the picture
On 13 November, the currency stood at US$0.7215 but on 19 October it traded at US$0.7306. That was still well down on the US$0.7804 at which it started the calendar year, but well off the year’s low of US$0.7020.
But hardly had traders decided the prospects were brightening than poor US housing market figures and renewed trade war fears were again putting the “Aussie” under pressure. It hit a low during trading on 20 November of US$0.7251.
The currency’s position is complicated by Australia’s position as a huge commodity exporter. Its riches include coal, , iron ore, and aluminium. For this reason, traders have tended to treat the dollar as a “proxy play” on commodities, its value rising and falling with the prices of raw materials.
The IMF supported Australia’s continuing monetary stimulus, with the base rate at 1.5%, saying “it is not yet time to withdraw macro-economic policy support, given remaining slack”.