Chinese economic policy and an improving US economy appear to have achieved what the Reserve Bank couldn't this week: taking the wind out of Australia's plucky currency, which fell to 11-month lows in early trading yesterday and is expected to fall further.
A possible realignment of China's $3 trillion-plus foreign exchange reserves combined with an improvement in the US jobs market to prompt a sharp lift in the value of the US dollar against a raft of other currencies, reminding investors yesterday that foreign exchange markets deal in relativities, not absolutes.
The greenback's rise in the early hours of yesterday (Australian time) pushed the Australian dollar down by almost US1.5c in less than an hour to $US1.005, its lowest level in more than 11 months.
The dollar also slid against other currencies such as sterling, where over the same period it fell by 1 per cent to 65.1p before making up half the ground it had lost.
But the bulk of the impact came from the US dollar, which punched up through the benchmark Y=100 level at the same time, during US afternoon trading. It was the first time in four years it had broken that mark.
Commonwealth Bank currency strategist Richard Grace said that all major currencies had fallen against the US dollar, including the euro, sterling and the Canadian dollar.
"There were a number of theories out there, starting with one about George Soros having taken a $1 billion bet against our dollar, but with $250bn going through the market every day, that wouldn't make any difference even if it was true," Mr Grace said. "A more plausible scenario is that China may be diversifying its $3.4 trillion worth of foreign currency reserves.
"April inflation figures in China were higher than expected and if they widen the trading band of the yuan, as they are planning, they'll get a faster appreciation of currency and with it, lower inflation.
"Either of those scenarios would destabilise markets, in which case buying US dollars would be an understandable strategy."
An irony of yesterday's lurch is that Tuesday's 25-basis-point cut in official interest rates in Australia was at least partly aimed at bringing the dollar down slightly. By any short-term measure, it did not succeed, perhaps because the RBA announcement was not emphatic enough. It forced the dollar down by around half a US cent to just under $US1.02 but by late Thursday it was back at $US1.025, where it had been before the cut.
High-profile US hedge fund manager Stanley Drunkenmiller had no such problem, announcing that he believed the dollar was expensive.
"We think the Australian dollar will come down and will come down hard," he reportedly said.
Another source noted of the US dollar's jump yesterday that as the yen weakened, Japan's ability to import was reduced and the Australian dollar was hit because after China, Japan is Australia's second-largest trading partner. CommSec economist Savanth Sebastian said he did not expect the dollar to move below US dollar parity in the short term, but it would move lower as the US economy improved. And that would be good news for the Australian economy, but bad for consumers.
A lower dollar would push fuel prices higher and make it harder for retailers to discount imported goods.
"But it would support the export sectors like manufacturing and agriculture," he said. "And, it may mean Australians are more likely to travel interstate than overseas, which will have a positive economic impact."
