Verrender: Why the Aussie dollar is set for a dive





Photo: Once upon a time, a strong currency was a matter of national pride. (AAP: Joel Carrett)

Verrender: Why the Aussie dollar is set for a dive

ANALYSIS

By business editor Ian Verrender

9 Oct 2017,

There was a bittersweet irony in the news.

The worst two-month slump in retail sales in seven years finally exposed the vulnerable underbelly of an economy that has been running on high octane fumes from a mountain of household debt.

The verdict from the nation's top economists was almost universal, delivered in uncharacteristically colourful language with terms such as "unexpectedly cratered" and "a shocker".

It was the decisive factor that sent the Aussie dollar into a spiral on Thursday, piercing through 78 US cents; a welcome decline that must have cheered Reserve Bank supremo Phil Lowe in his Martin Place eyrie.

All year, Mr Lowe persistently has bemoaned the strength of the currency, how it was weighing on economic growth and employment.

That it took such dire numbers on retail sales to jolt market traders — who just weeks ago had their sights set on a run towards 90 US cents — would give no real comfort.

Why everyone wants a weaker currency

Way back in the dim dark ages, a strong currency was a matter of national pride. Opposition leaders would berate and chide a government that presided over a weakening dollar.

Not any more. The "mine's bigger than yours" mentality went out of style in the 90s when politicians began ceding control of the economy to central bankers who had no qualms about engineering a weaker currency when they wanted to boost growth.

Exports are cheaper and consumption shifts to domestically produced goods

That worked well when individual countries responded to domestic troubles. But when the financial crisis a decade ago simultaneously delivered every major developed country to the brink of ruin, central banks from Washington to Tokyo, to Brussels and beyond pulled out all stops to achieve an advantage over the others.

Central bank bubble trouble

They flooded the globe with cash. They pushed interest rates into negative territory. It was a war in a zero-sum game where there could be no winners.

Australia was a major casualty of that war. As the financial crisis threatened to pull us into the vortex, our currency plunged from parity against the US dollar to about 60 US cents in just six weeks.

It was a circuit breaker that delivered a jolt to the economy's heart.

But it was short-lived. Just as the US, Europe and Japan undercut their currencies, China's debt-fuelled investment spree gathered pace, boosting our exports and commodity prices, prompting vast amounts of investment cash to flood in.

That pushed the Aussie battler to a post float record of $US1.10, a move that hollowed out our industry and changed the country forever.

While the Reserve Bank boffins now reassure us that our "economic transition" from the mining boom is almost complete, what they secretly desire is a dollar that is more like a South Pacific peso; one that sits well below 70 US cents, that would boost national income and fuel some inflation.


 














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