Australian to US Exchange rate

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Permalink Reply by JeffK on November 24, 2008 at 16:18

While this isn't a definitive answer because forex is bloody complicated with myriad influences, it is ONE reason why the Aussie dollar may be falling. And note that it is falling against all currencies, not just the USD. Have a look at the Euro and the Yen - similar story there.

It all comes down to demand for resources. We have heaps of stuff in the ground, and the more people want it, the higher the demand for Australian dollars. Higher demand for Aussie dollars pushes the price up. The reason for this higher demand is that if people want to buy Australian resources, they will have to buy it in Australian dollars - this means they will have to convert their currency into Australian dollars to but the stuff. The problem at the moment is that the demand for resources is weakening (global slowdown = lower demand for goods, which means that less resources are needed to make the lower amount of goods demanded), which means there's a lower demand for Aussie dollars. Now this is both a real lower demand, plus there are speculators who are pushing the price of the Aussie dollar down in anticipation of the Aussie dollar falling.

As I said, this is just one reason (and also just my opinion!).

I agree that the USD shouldn't be so strong given the disastrous state of their economy, but this can change very quickly. One reason for its strength could be Americans cashing in on their overseas investments and bringing money back home (i.e. buying US dollars), but I'm not sure how much of an influence this could have as the Forex market is MASSIVE.

Anyone else have any ideas?

JFK

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Permalink Reply by Anthony Farrugia on November 27, 2008 at 18:55

I do not consider myself an expert either, but OPEC cuts oil production to keep oil price up. Now why dont we do the same with our resources. Similar to oil once they are dug up there will be nothing there.
Also, the RBA should stop devaluing our dollar by lowering interest rates
The government can help by increasing infrastructure spending, hence creating more jobs.
More jobs = more spending in construction, which in turn keeps the economy going
So please, Mr government no more hand outs, increase spending instead

I am sure that others have further ideas!!!

APF

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Permalink Reply by Kbot on November 30, 2008 at 0:06

This is complex...if we stop lowering interest rates then doesn't the housing market and wider economy start to suffer?

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Permalink Reply by MoneyMagnet on December 2, 2008 at 14:51

There are several reasons.
1. Our economy is strong in raw resources. As world demand for "things" slows because the mums and dads around the world are more worried about their finances and will not purchase as much stuff, so does the requirement for these resources slows. The little factories in China are not required to make as much stuff and therefore have stopped ordering steel and a myriad of other raw materials that we provide. Investments in the mining companies have also decreased.
2. As their own economy is now in recession, people and companies are pulling their investments in from foreign companies either to buoy up their own business or because they are looking for more stable investments away from the commodities markets.

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Permalink Reply by Bytta on December 2, 2008 at 21:44

well, another view i want to offer is the fact that AUD is a high-yielding currency compared to USD and JPY. i work for a forex trading company for a few years so i know a bit about forex market.
during bullish market, high-yielding currency like AUD becomes a very attractive currency where people from low-yielding currency like japan invest money in AUD. it's called carry trade.
due to volatility in the market and aggressive rate cuts, the investors viewed high-yielding currencies too risky and the return is no longer seen as attractive. so they pulled their money out.
if you look at JPY, it's actually the only currency that appreciates against USD because their interest rate is lower (0.50%) than US's rate (1%).

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Permalink Reply by Keith Musgrave on December 3, 2008 at 10:36

Hi everybody,
I support Bytta's view in this matter.
There are many countries and companies and investors around the world who are lookinf for investment opportunities. Many of these "investors" have substantially large sums of money (like $000 millions & billions) to invest and they are just like you & me with our $5,000 & $10,000. We want to get the best return that we can, so we go looking. The opportunities for these investors are more limited due to the amounts they want to invest as well as the "liquidity" of the investment. Liquidity simply means the ability to get your money back when you want it. A bank term deposit is an "illiquid" investment as well as real property as they cannot be cashed in today. Shares are a "liquid" investment, so you can wake up this morning & decide you want to sell your 100 BHP shares and by lunchtime, they are gone. These larger investors, however, are not able to invest 100's of millions of dollars into shares as the sheer amounts will have an impact on the intrinsic value of the underlying asset. So they look for markets where they can invest large sums of money. Money market is 1, and currencies are another.
If a company in Japan or China or the Middle East (oil rich nations) have money to invest they look at the return on their investment (naturally). But remember, every investment has a "risk versus reward" opportunity. So, if this company has a spare $100 million sitting around, they might look at the interest rates in particular countries and say Japan is paying 0%, USA is paying 0.5% and Australia is paying 4.5%, then Australia looks good. However, remember our risk v return, and this company says that they are happy to take the risk of investing in Australia as it has a stable economy, it is a resource rich country, so I will invest.
All of that is very good, however, what happened recently, was that many investors just decided to cash in there investments because they may have wanted to pay back some of their own loans or they just got nervy about their money. (As we saw in Australia with investors wanting to cash in their investments in mortgage trusts when the Fed Gov "Guaranteed" bank deposits)
This simply meant that many investors simply sold all or some of their investments in currencies. The US$ is nearly always considered the "safest" currency, therefore, many currencies fell in value and the US$ rose.
It had nothing to do with the actual value of the currency, purely, supply & demand, nobody wanted Aussie dollars and everybody wanted the mighty greenback.

Just as an asisde to this. Remember about 5 years ago, when a barrel of oil was trading at about US$20 and our oil producers were making a s**t load of money. Well, have a guess how much money our oil barons have now? The costs to produce a barrel of oil would not have increased much over that time, but the value of a barrel rose to about $140. Many of the major governments around the world are pledging billions to fix this economic problem, have a guess who has got the money to lend to the majority of the western world????

The mind boggles!!!!

Don't forget to turn off your taps & non essential power usage.

Bye for now

Keith

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