Samantha Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. You may not have noticed unless you’ve been travelling overseas, but the Australian dollar is on the slide and there are fears it could fall below rates seen during the pandemic and the global financial crisis. Today the ABC’s business editor Ian Verrender, on how China’s economic woes are partly to blame and what it means for our economy. Ian, let’s talk about the Australian dollar. It’s been a wild ride since our currency was floated in 1983.
Newsreader: By late this afternoon it was clear that the float had gone remarkably smoothly. The markets had calmed down, taking the changes in their stride.
Samantha Hawley: And once upon a time, a while after that, we hit parity with the US dollar. That was all a bit of fun while it lasted.
Ian Verrender: Certainly was.
Journalist: So many are cheering the rise of the little Aussie battler, rolled gold dollar.
Samantha Hawley: Yes, it was in 2010. Do we like being at parity?
Ian Verrender: Look, it has its benefits and it has its downsides as well. And that’s one thing I guess people don’t realise about the currency. You know what it really is? It’s a shock absorber for the economy. And so, you know, being having a strong currency can be advantageous. It can also bring a lot of pain. And the same thing happens with a weak currency as well.
Samantha Hawley: Yeah. All right. So the poor old dollar now, though, it’s not very happy, is it?
Ian Verrender: No, it isn’t. We’ve been on the slide for quite a while, actually, and mostly it’s been against the US dollar. And that’s one thing I think, you know, everybody needs to understand while we we price ourselves against the US dollar. Every other currency does as well, every other country. And so often and in fact, until fairly recently, we were keeping pace with pretty much every other country in the world and, you know, dropping against the US dollar. But we are now dropping against the other currencies as well. And that’s partly because for two reasons. One is that the US economy is running hot and China, which is our biggest trading partner, is running very, very cold. And that’s what’s caused us to now drop against the Euro, the pound and pretty much every other currency.
Samantha Hawley: Yeah. Okay. So let’s unpack that a little bit more in a moment. Now we’re seeing a risk that the dollar could potentially fall below 60 US cents in the near term. That’s great news, of course, for all those visitors who flocked here during the Women’s World Cup.
Tourist: I haven’t really worried about money as much because the exchange rate is so good for us. So we’re always going, well, that’s not so expensive, you know.
Tourist: So it did make us feel a little bit more eager to spend while here.
Samantha Hawley: But you’d be feeling the pinch right now if you were overseas, wouldn’t you?
Ian Verrender: Oh, absolutely. And that’s, you know, like, as I said, you know, for a long time there, if it was only really hurting, if you were going to America, if you were going to Europe or, you know, the UK or, you know, even some countries in Asia, you would have not really felt any any change whatsoever. Now we are falling against everybody. So it is it’s not heading our way.
Samantha Hawley: No. So the dollar doesn’t go too far when you’re travelling overseas. But even if you’re not travelling, Ian, we want a strong dollar, right? It’s a sign of national strength, surely?
Ian Verrender: It used to be, yes. You know, for a long time there pretty much every country in the world wanted a strong currency. And, you know, it was considered a statement of national strength and economic superiority. It was always an article of faith in politics that if your currency dropped and it didn’t matter whether it was here or overseas, if your currency dropped, the opposition could stand up and say, look, this is the report card that we’re measured against around the world. Our currency is dropping at the moment. And that just goes to show that you lot of poor economic managers, we need to get a stronger currency back in place.
Samantha Hawley: So that’s how we felt up until the point of the global financial crisis. So what changed in our thinking about the dollar after that?
Ian Verrender: Well, our thinking changed around that time, but we were slow to the party because in the lead up to the global financial crisis and Japan really led the way in this, it was the forerunner, the experimental country, I guess, for quantitative easing, which is essentially money printing and driving your interest rates down and therefore driving down your currency. And so they started to do this. And America and pretty much every other country around the world was looking at this going, there are big advantages in having a weak currency because it makes your exports a hell of a lot cheaper. And so in the lead up to the global financial crisis, China was doing this and America started to do it as well. They were trying to push their currency lower to get a trade advantage.
Samantha Hawley: And we, Ian, were caught in the crossfire.
Ian Verrender: Yeah, absolutely. I mean, in the aftermath of the financial crisis, particularly, you know, China really threw mountains of cash stimulating its economy. And that sent iron ore prices into the stratosphere and it boosted our national income. So our economy did very well while everybody else did quite badly.
Journalist: As the US economy splutters under an historic level of government debt, making US assets less attractive and all things Australian more desirable for foreign investors.
Ian Verrender: And so as a result, our currency hit around $1.10 against the greenback and it was up to $0.86 in the euro. So, you know, we were really, really very strong and that’s, you know, great if you’re a tourist.
Journalist: But parity would have severe implications for the Australian economy and millions of workers. Some sectors of the economy are finding the rise and rise of the dollar excruciatingly painful and are hoping it will stop.
Ian Verrender: But look that soaring currency had two effects. I mean, the first was a huge amount of foreign money flowed into Australia to build new mines and second, interest rates remained much higher than the rest of the developed world here, which also attracted vast amounts of global capital seeking out a decent return. And so that boosted the Aussie dollar even further. And while that may have on paper made us much wealthier than we’d ever been because we could buy things from offshore at a much cheaper rate, it really had some debilitating effects. It hollowed out the Australian economy. Our manufacturing industry pretty much evaporated.
Samantha Hawley: Wow. So a strong Australian dollar was actually a bad thing for us?
Ian Verrender: Yeah, because what it did was it it made it much cheaper for all of us to buy our things from other places offshore. And that made it very hard for local manufacturers to compete against, you know, much cheaper imports.
Samantha Hawley: So, Ian, let’s go back to today because the dollar is certainly running in the other direction right about now and quite quickly. So let’s unpack what’s happening. And I think I just want you to explain how volatile the Australian dollar is and why it is.
Ian Verrender: Yeah, look, we are one of the more volatile currencies on the global financial markets and we always have been. A couple of reasons for that. One is where we might be a very small country, you know, globally, but we’re a big exporter of commodities, energy and food, and that makes us a major trading currency. And so a lot of international traders look at Australia because they know it’s going to be volatile. They’ll be trading it all the time to try and make a profit. But, you know, if you get changes in, say, the price of iron or you get changes in the price of oil, you get changes in the price of wheat. That really affects what happens with the Aussie dollar. America might be able to influence their currency, Japan theirs as well. The Europeans, you know, through the European Central Bank, we’re a small player on that global market and our government and our Reserve Bank can’t really compete against those other big forces. So that leaves us sort of trading out there in a sea of volatility and a lot of money being thrown at it.
Samantha Hawley: Yeah, so we bounce around because of world events and that’s happening again now.
Ian Verrender: Yeah, absolutely. I mean, and the big factor for us is, you know, as I said, to start with, well, there’s two. One is the US dollar is really powering ahead at the moment. So it’s, you know, going up against the euro, going up against everything. But the other big factor that particularly relates to us is China. And China is in a world of pain at the moment in terms of its economy. So there’s a lot of speculation that iron ore prices will continue to decline. So that will put more pressure on the Aussie dollar as well.
Samantha Hawley: Yeah. Okay. So China’s woes will keep driving our dollar down.
Ian Verrender: Yeah, absolutely.
Samantha Hawley: Just explain the interest rates a bit more for me. You mentioned interest rates in the United States. How does that work and what about our own interest rates? What do they mean for the dollar?
Ian Verrender: Well, interest rates affect currencies because traditionally we always had a fairly strong currency because we were exporting a lot of commodities that were worth a lot of money. But to build those mines, to attract the capital into Australia to to develop all those resources, we had to offer the world a higher rate of return because we’ve traditionally invested a lot more than we’ve saved. So we didn’t have the the pool of savings here to fund all that investment. And so America at the moment has got much higher interest rates than us. You know, our official rate is, you know, just over four and America’s is just over five, five and a half. So the money is all going towards America at the moment. And because the money is flowing into that country, its currency will rise because they you know, when you’re converting money, you have to buy US dollars. If you’re going to send money to America, you have to buy US dollars. That pushes the the value of the US dollar up. And we can’t compete with that at the moment.
Samantha Hawley: Okay. So our relatively lower interest rates will weigh on the Australian dollar? Yep, absolutely. So it sounds like, Ian though, your message is that even if the dollar dips further, we shouldn’t panic because there are there are advantages to weak currency.
Ian Verrender: Yeah, absolutely, I mean, and as I said, you know, this is the currency and a volatile currency that we have is a really, really handy thing to have because it’s a shock absorber for the for the economy. Back through the financial crisis, the currency dropped from well over a dollar down to $0.60 in the space of a couple of weeks. And what that did was it shielded our domestic economy from what was going on in the rest of the world. It was actually a very good thing to happen because a weak Australian dollar boosts the value of money that’s coming into the country. You know, if you’ve got a weak, a weak Australian dollar then and you’re an exporter, then suddenly the money that you’re making offshore is worth a lot more. Downside is that it means that inflation is going to be higher, so cost of living pressures will remain. And that’s one thing that the Reserve Bank will have an eye on.
Samantha Hawley: All right, So it’s a bit of a mixed bag, but what’s your prediction then, Ian? How low will it go?
Ian Verrender: I think the weakest the currency ever got was around about $0.48 and that was during the Twin Towers attack in the US, the terrorist attack that took place. And that was again, that shut all global trade down. Another time was when Paul Keating back in ’86, said that we were going to be possibly a banana republic.
Newsreader: Meaning deficits triggered one of Paul Keating’s withering observations.
Former prime minister Paul Keating: This government can’t get the adjustment, get manufacturing going again and keep moderate wage outcomes in a sensible economic policy than Australia’s basically done for. We’ll just end up being a third rate economy, you know, a banana republic.
Ian Verrender: And the currency dropped like a stone, then it went down into the 50s. I think we could get down into the 50s again, particularly if China’s woes continue. As pluses and minuses both ways. So you shouldn’t really think of it as a disaster because the currency drops. It is a shock absorber.
Samantha Hawley: Yeah. So stay calm. Yeah. Thanks, Ian.
Ian Verrender: Thanks, Sam.
Samantha Hawley: Ian Verrender is the ABC’s business editor. The weaker exchange rate has contributed to petrol price increases because it’s more expensive to import fuel from overseas. This episode was produced by Veronica Apap, Anna John and Sam Dunn, who also did the mix. Our supervising producer is David Coady. I’m Sam Hawley. ABC News Daily will be back again tomorrow. Thanks for listening.
