The Australian dollar is rising against most of its counterparts overseas, which makes it a great time to go abroad for a holiday. While this may be a plus point for Australians as a whole, it does create a negative effect for other parts of the Australian economy.
Right now the Australian dollar is sitting at the highest level, since the creation of the currency, against the euro. It is also at this level against the pound and very close to its highest level against the American dollar.
With the Australian dollar rising as it is, goods purchased overseas are more affordable. Imported goods for consumers and holidays overseas are more within the reach of the average Australian than they have been in a long time. Businesses that have debt oversees will have an easier time paying them off since they are now cheaper.
Effects of the Australian dollar rising
Getting hit hard is the Aussie tourism industry and local exporters. This explains why there have been lower readings regarding business confidence during the last few months.
When the Reserve Bank started raising the overnight cash rate during the month of October the Australian dollar began to rise. This means that the RBA needs to raise its rates as well since the strength of the country’s currency is a reflection of the strength of the country’s economy. Also, the fact that the global financial crisis experienced recently did not affect Australia greatly means that the RBA will need to raise its rates.
2011 is the expected time for Japan, UK and Eurozone to raise their interest rates. U.S. rates may go up slightly higher close to the end of 2010. The rates in Australia will probably rise another 50 to 100 basis points by the end of the year. This differential in spreading rates is making the Australia currency climb to these new heights.
The chief economist of NAB, Alan Oster, expects the Australian dollar to equally match the American dollar. This will cause trouble and hardship for exporters and manufacturers.
Michael Workman, a senior economist that works at the Commonwealth Bank, thinks differently. He believes that the Australian dollar will reach 94 U.S. cents and struggle there.
When you consider the Australian dollar and how it can make such changes at both a domestic and international level, it seems to take on a new importance.