International currency markets have left Australia a Christmas present – a dollar around US80c.
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The dollar had been unusually high relative to other major currencies for an unusually long period. That helped stabilise the economy during the heights of the China-driven mining boom. But now that the effects of that boom have faded, a much lower dollar is needed to help the economy make a transition as other growth drivers take over.
This month's forecast by the Federal Government that unemployment will reach 6.5 per cent this year – a higher rate than during the global financial crisis – underscored how the economy is labouring through that transition.
The dollar's lingering strength puzzled analysts for much of the year. But sentiment seemed to shift in September and the currency has been in steady decline ever since. This week it dipped to US80.8c – its lowest mark since mid-2010. The dollar has now shed about US30c – or more than a quarter of its value against the greenback – since peaking above US110c in mid-2011. Even so, the exchange rate is still comfortably above its long-term average around US76c.
The Reserve Bank, and many industries, will be greatly relieved to see the currency falling back at a more normal level. Why? Because a lower dollar makes everything foreigners purchase from us less expensive. That will help boost demand for the goods and services produced by important sectors of our economy including tourism, education, agriculture and manufacturing exporters. As demand for our exports picks up, local businesses will need to hire more workers and purchase more goods and services. Over time that should bring down the jobless rate.
There are losers of course. A falling currency dents the profits of firms reliant on imports – like many retailers. Big ticket imports like cars and electronic gadgets will cost more. Overseas travel will be more expensive as will goods purchased online from overseas. It might also put some upward pressure on the cost of petrol, although fuel prices are low at the moment thanks to a plunge in the international price of oil.
The dollar's past ups and downs have had big influence on the public's feelings about the economy. When it crashed to US57c in 1986 following Paul Keating's "Banana Republic" warning and fears about Australia's creditworthiness, consumer sentiment slumped too. When the dollar plummeted towards its all-time low against the greenback of US47.7c in 2001, consumer confidence registered another dramatic fall. Conversely, strong gains in the exchange rate have often helped boost consumer sentiment.
But the influence of the dollar's gyrations on the consumer mood is changing. The recent strength of the exchange rate has challenged the assumption that a rising dollar is always a good thing. When the Westpac-Melbourne Institute consumer sentiment survey asked a special question about the exchange rate following a period of depreciation last year, 41 per cent said the decline was "favourable" and only 22 per cent said it was "unfavourable". There seems to be a growing recognition that a very strong dollar has its downsides.