Is the Aussie dollar actually getting stronger?

Australia Broadcast Center

3 days ago

Confused about all those news reports on the strength of the Aussie dollar?
For most of this year, there's been a constant message that the local currency is shooting the lights out, bounding to ever greater heights.
Since the beginning of the year, it has jumped more than 10 per cent against the US dollar.
That sounds like reason to celebrate until you look at travelling or purchasing something online from anywhere other than the US.
That's when the penny drops, if you'll excuse the pun. That's when you realise the Aussie dollar fundamentally remains weak, especially given it was around 80 per cent stronger a decade ago.
For the story is not so much one of Australian dollar greatness. It's more a tale of the decline in the greenback and an erosion of trust in Washington.
The once almighty American dollar has been falling against almost every major currency ever since Donald Trump became the 47th US president.
None more so than the Euro which has risen more than 15 per cent against the greenback this year.
It began with President Trump's inauguration following his pledge to impose tariffs on America's trading partners.
It accelerated with the chaotic tariff implementation in April, the escalating threats against China, Canada and Mexico and then the backdowns.
The clout the US holds as the world's biggest economy, and the benefits that flow from controlling the global reserve currency, is beginning to unwind.
The French refer to it as "privilege exorbitant".
It's a term that highlights the power conferred upon the US by virtue of its currency being the international standard by which all others are measured.
Everything, from currencies to commodities, is priced in US dollars. America is in the sole position of being able to purchase its imports in its own currency. Everyone else must convert to US dollars.
That boosts demand for greenbacks, strengthening the currency and making it cheaper for Americans to buy products from abroad.
It also lowers US interest rates. America's central role in the financial system has ensured demand for US government debt from international investors.
US government debt is considered the safest investment on the planet and, in times of turmoil, investors dump everything and head for the safe haven of American government bonds.
That's now changing. And the change, under the Trump administration, is accelerating.
At the turn of the century, the US dollar accounted for 73 per cent of global foreign reserves, such was the international demand by foreign governments for greenbacks.
By the end of 2024, that share had dropped to just 58 per cent.
It's a similar story with US Treasuries. A decade ago, foreigners held more than half of US government debt on issue. That's now down to a third.
The rise of BRICS — Brazil, Russia, India, China, South Africa — has been deliberately targeted as an alternative to circumvent America's dominant standing in the global financial system.
They've been joined by Egypt, Saudi Arabia, Argentina, Ethiopia, Iran and the United Arab Emirates as part of the push towards de-dollarisation.
For the first time, they're being directly aided by the US itself.
There is a view within the US administration that the US dollar's reserve currency status is a burden on the economy.
As we discovered during the mining investment boom, the surging Australian dollar rendered much of our manufacturing sector uncompetitive. The price of imports plunged, sending many local operators to the wall, or forcing them to shift their production offshore.
But the decline in the Aussie dollar, from $US1.10 more than a decade ago to 65c now, has done little to reverse that trend.
Australia essentially has de-industrialised. Manufacturing comprises just 5 per cent of the economy, the lowest in the OECD, which is one of the reasons our productivity growth is so low.
Trump believes a weaker US dollar, and stepping back from its central role in global finance, will revive American industry. But at what cost?
What the administration fails to grasp is the impact of its reserve status on interest rates. The American economy has thrived because of the sheer volume of global cash coursing through its system.
Deliberately walking back from that will have the opposite effect. Interest rates will rise and Washington will struggle to keep its finances in order as the interest bill — already at $US1 trillion a year — continues to grow.
Europe has been basking in the glow of America's woes.
America's increasing use of financial sanctions against its enemies already had undermined confidence in the US dollar as the pillar of global finance.
But the Trump administration's aggressive approach to trade and defence with even its closest allies has shaken international trust in the US's standing.
In April, as financial markets plunged on news of the President's Liberation Day tariffs, the US dollar slumped and the flow of money out of the US turned into a flood.
Much of it found its way to alternative safe havens in Switzerland — pushing the Swiss Franc higher — and other part of Europe.
As a result, the euro appears now to be permanently elevated. That's despite much lower interest rates across the European Union.
Australians, in the meantime, gradually are becoming accustomed to measuring the currency against an array of alternative yardsticks.
We may have strengthened against the US dollar this year. But so has everyone else.