Agriculture, manufacturers and other exporters could suffer if the Australian dollar continues to push through two-year highs against the US dollar off the back of soaring commodity prices.
The Aussie rose 10 per cent against the greenback during 2020 to hit a two year-high of US77¢ on December 31 amid a broad weakening of the US dollar, while marking smaller gains against the pound (up 4.8 per cent), the Japanese yen (3.1 per cent), the NZ dollar (2.7 per cent) and Chinese yuan (up 1.3 per cent).
The rise against the US is expected to continue, with Westpac forecasting the Aussie to hit 83¢ by the end of 2021, ANZ predicting 80¢ and Commonwealth Bank 78¢.
Sarah Hunter, chief Australian economist for BIS Oxford Economics, said manufacturing, agriculture – already reeling from Chinese tariffs – and other exporters would be most exposed by the stronger dollar if overseas buyers shifted to cheaper competitors or had to accept lower sale prices.
“They will see some exposure, but at the moment the impact of this will be very much swamped by COVID and what that’s doing in terms of spending patterns across the global economy,” Dr Hunter said.
Australia’s tourism and education sectors are normally vulnerable to a rising Australian dollar, but at the moment are virtually shut down due to the COVID-19 pandemic, she said.
Deloitte Access Economics partner Nicki Hutley said demand for Australia’s iron ore, which hit a record high if $US176.45 last month, and other resources would not be affected by the stronger dollar as China unleashed a wave of infrastructure spending to drive its COVID-19 economic recovery.
Although the downturn in demand from trading partners ravaged by COVID would be a far bigger hit than anything the Aussie dollar was doing, Ms Hutley she would be much more nervous about the dollar acting as a brake on our own economic recovery if it passed through 80¢.
“Clearly as we get a vaccine roll out and the global economy starts to recover, the last thing we want to see is the Aussie hampering that,” she said.
Retailers and other importers could benefit from greater purchasing power abroad, she said, which could either be passed on to consumers or kept as profit. Although Commsec chief economist Craig James said the stronger dollar could lead more consumers to shopping online for overseas retailers.
Reserve Bank governor Philip Lowe told the House of Representatives Standing Committee on Economics last month that the dollar would be even higher if the bank had not lowered interest rates to a record low 0.1 per cent.
Independent economist Saul Eslake said the dollar’s rise would make it harder for the RBA to hit its inflation and employment targets. However he said there was little it could do except expend its $100 billion government bond-buying program.
“Trying to fight the fundamentals – iron ore prices, the US dollar itself, what much bigger central banks are doing – is probably not going to be very effective,” he said.
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Source: Thanks smh.com