Sara Rich | October 17, 2009 Article from: The Australian
THE Australian dollar's astronomical run is threatening to put a brake on the economic recovery, with exporters fearful they will be put out of business if it rises much further.
Every time the dollar increases in value against the enfeebled US dollar and other major currencies, Australian exports become more expensive for customers and less competitive in global markets.
Once known as the Aussie battler, the dollar has risen about 50 per cent in the past year from lows of US60c, and based on this week's stellar performance is quickly heading towards parity with the greenback.
Driving the gains are the wide interest rate differential from Australia to the rest of the world, the general decline in the value of the US dollar and the strength of commodity prices, because about 70 per cent of Australia's exports are commodity-related.
In economics this is called the resources curse -- you have a strong currency because of demand for your resources, but that makes it harder for businesses to compete globally.
Yesterday, the dollar ended the local trading session at US92.25c, up from Thursday's close of US92.23c, bringing the week's gains to more than US2c.
There is even talk that it could rise to $US1.10c based on the economy's strength and the Reserve Bank of Australia's hint that there would be more interest rate rises to come after it raised the official cash rate by 25 basis points to 3.25 per cent last week.
This is great news for those planning an overseas holiday, but local businesses that rely on offshore customers are extremely concerned.
At greatest risk are carmakers and other manufacturers, tourism operators, services companies and financial services firms that have large offshore operations.
Expected to be less affected are miners, because for commodity exporters the rising dollar is offset to some degree by strong commodity prices, which have recovered since the global downturn amid renewed demand from China and others for Australia's resources.
Soft commodity producers, such as the rural sector, do not get the benefit of an offset though, as there is not the same demand for their products.
Alan McDowell, chief executive of Auto-Bake, a Sydney business that exports industrial ovens, mainly to the US, Europe and Middle East, said the company's prices had jumped 40 per cent in the past six months purely because of the rising dollar.
"It's all very well to say people understand that it is the exchange rate, but to a buyer in the US, they are paying 40 per cent more than they were six months ago, and they don't care why or who or how," he said.
"So it is a major impediment and, compounded by the financial crisis and economic crisis over the last 12 months, it has just made life very difficult."
AMP Capital Investors investment strategy head and chief economist Shane Oliver predicts a continuing decline in Australian manufacturing as a result of the rising dollar.
"It is certainly going to be painful for manufacturers, whether they have to compete with imports or whether they are trying to sell their goods overseas, because they are going to be a lot less competitive," Dr Oliver said.
"I didn't think (the dollar) would rise this fast but I do think we will be retesting parity soon and probably going beyond that, and that means a lot of pressure on Australian manufacturers."
It invites the question then, why doesn't the Reserve Bank intervene in foreign exchange markets to dampen the currency's ascent?
There was speculation in Asia this week that several central banks were doing exactly that -- buying US dollars to bring down the value of their own currencies.
According to Geoffrey Garrett, chief executive of the US Studies Centre at the University of Sydney, China may be an example of where that is occurring.
"China is criticised in the whole world but most importantly in the US for what critics say is artificial management of the Chinese currency to keep exports strong," he said.
"If you are looking around the world, that's the example of a currency that seems too low and that advantages manufacturing exporters." Mr Garrett does not think it makes sense to say it works for China, therefore it will work for Australia, as the two economies are different.
He thinks a wiser move would be for the Australian government to use the revenue generated from a stronger exchange rate to make the rest of the economy more productive.
"Improving the competitiveness is really about making your exporters less price-sensitive and the way to make them less price-sensitive is to make them compete on quality, not price," Mr Garrett said.
"The country has benefited enormously from a floating exchange rate -- it would be silly to change that policy."
As Dr Oliver puts it: "No country has ever found its way to wealth by currency devaluation -- if it did that, then Bolivia would be the world's richest country, along with Zimbabwe."
There are also many Australian firms benefiting from the currency's strength.
In this category are importers such as Melbourne-based Germanicos, a tailor that buys luxury fabrics from Italy, England and France.
"It is saving us about 40 per cent -- we are saving thousands of dollars every week and what that means for us is now we can go and employ more people," director John Tellis said. "We are in the process of expanding the business," and that is because of an easing of pressures caused by the low currency.
Australian Trade Commission chief economist Tim Harcourt said about 45 per cent of Australian exporters were also importers, "so a high dollar may mean a more expensive product on the price side, but it may also be cheaper on the cost side when an exporter imports components or stock".
His outlook is optimistic for Australian exporters.
"Long-term growth in export volumes are mainly determined by global economic demand, so a continuation of above-average trend growth in the world economy, particularly in the Asia-Pacific, will be a more important factor affecting exporters than a US90c-plus exchange rate," Mr Harcourt said.
"If the emerging economies can lead the recovery from the global financial crisis, this will be crucial for our exporters."
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