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That seventies and eighties show

That seventies and eighties show

Money market watchers have had quite a start to the year, with the Australian dollar gaining a cent a day at the very beginning of this month and closing last Friday at a six and a half year…

Money market watchers have had quite a start to the year, with the Australian dollar gaining a cent a day at the very beginning of this month and closing last Friday at a six and a half year high of 77.49 US cents. Not that an ascendant dollar is by now anything new. Our currency kicked off 2003 at 56.09 US cents and continued to rise over the subsequent 12 months.

Despite drops in March (when the Aussie dollar was dumped in favour of the greenback just prior to the Iraq War) and July and August (when optimism about growth in the US boosted that country’s dollar), the Aussie ended the year at 75.36 US cents, nearly 20 cents up on January’s figure.

The prospect of a dollar worth 80 US cents — initially flagged by forecasters for later in the year — now seems just around the corner. Exporters, whose concerns grew through 2003, now fear they may be unable to compete with their US counterparts — at least in the short term — with potentially devastating effects for smaller companies. Adelaide’s The Advertiser last Friday offered Dentsleeve, an Adelaide-based manufacturer of specialised medical devices as a worrying case study. After apparently considering closure for several months last year, Dentsleeve was finally forced to shut down operations earlier this month.

The rising dollar has also largely negated gains for Australian investors in diversified super funds. Despite general improvement in the international share market accompanied by improvement in super returns during 2003, the dollar’s counterbalancing effect has denied investors the benefit of these gains.

By contrast, there is good news and some currency strategists are suggesting it could be very good — not just in the next few months but also in the long term. The Asian economies are growing confidently and demand in areas such as metals and manufacturing is set to increase, benefiting Australian producers. China’s role, in particular, will be central to this development. In addition, Asian central banks are said to be looking around for alternatives to US dollar bonds in which to invest and the Aussie dollar is thought to be close to the top of the list, with things only likely to get better as the year progresses.

Whether the Aussie is close to being, or is already overvalued, is an interesting question and certainly some analysts have suggested the latter. All the more reason for close scrutiny as it teeters on the edge of the 80 cent mark.

Developments in the US suggest the Federal Reserve is unlikely to push for higher interest rates in the first half of the year and grim employment figures released over the weekend will reinforce this. The data, which show only 1,000 new jobs were created in the US in December, prompted falls in the Dow Jones and European stockmarkets but pushed the Australian dollar up to its Friday close of 77.49 US cents. Further economic data were expected later this week, which will likely have shed more light on the course the Fed will be steering.

Back home, the Reserve Bank’s meeting next month will almost certainly confirm the Bank’s commitment to high interest rates, a stance which several analysts say will continue until at least mid-year.

Whatever the Bank chooses to do, one thing is certain: the Australian dollar will retain the lead role on the 2004 economic stage.

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