As the US dollar depreciates, the Australian dollar gains. In an effort to save dollars for purchases of other goods and services, Australian consumers are investing in domestic assets such as property, foreign exchange and gold. In doing so, they are betting on the upside of the Australian dollar.
To be sure, this outlook has not been without its critics. Some have argued that rising inflation has placed an extra burden on the Australian dollar and is likely to weigh heavily on the economy as the fall in the US economy continues. If it were only the US economy that was being affected, this criticism would be justified.
Yet, this one country accounting for one-sixth of the world’s economy accounts for just four percent of the one-dollar basket of goods and services used by the rest of the world. In these circumstances, there can be little doubt that the impact of the US falling out of the Eurozone does not hold equally for everyone else.
When deflationary pressures begin to threaten, currencies go into a long term decline, often leading to a fall in their purchasing power. In a deflationary environment, individuals and companies save and invest their funds in assets with relatively lower interest rates. The resulting rise in asset prices gives these investors a buying opportunity.
So while the US economy is still struggling with unemployment, wages have stalled and inflation is running away with consumers, the Australian dollar is rallying ahead of the trends around the world. Rising confidence in the strength of the currency has translated into low interest rates for Australian borrowers and a sharp fall in the one-dollar basket of goods and services used by the rest of the world. In other words, the Australian dollar is enjoying the benefits of economic strength as the US economy stalls, the Eurozone falls apart and inflation rises.
If this holds true for longer, it is unlikely that the US will be able to bail itself out of its economic troubles any time soon. While no one can be sure what the next few years will bring, it is safe to say that there will be no quick fix in sight. So when the US economy falters, as it always does, the Australian dollar does not suffer as much as some would have hoped.
One of the main reasons for this has been that Australian consumers have been quite choosy about where they invest their money and what assets they buy. They may invest their savings in land, shares, stocks or bonds. To some extent, this means that as a result of the fall in the value of the Australian dollar, they will be able to take advantage of the appreciation in their asset prices.
It also means that their gains are limited to a certain amount. They may find themselves limited to higher returns on their investments, rather than an outright increase in their wealth.
This is particularly the case with financial assets and commodities, such as energy, gold and coal, which rely on the price of crude oil and other commodities to appreciate. The fall in the price of crude oil has led to sharp declines in the value of most of the commodities with which Australian investors had invested, such as iron ore, coal and iron ore.
Most Australians are getting a bit of a wake up call, as rising costs and the ruination of consumer confidence that result from these changes hit their pockets. Despite these looming problems, the Australian dollar is still strong enough to withstand the heat.
With the moderate and gradual recovery in the US economy, that will likely continue for the next few months, there will be little reason for the Australian dollar to fall further. In fact, the more it rises, the more resilient it becomes.