So when the U.S. dollar reaches parity with the Australian dollar, a 15-year low versus the yen, and a two-year low against the kiwi – all of which has happened in the last month - you can be sure that bets are being piled on.
Australia’s economy proved resilient to global recession because its vast mineral wealth provides the raw materials for China’s manufacturing base, which continues to lead strong growth in developing countries.
While the Aussie has been dragging the kiwi dollar up with it, there’s no likelihood any time soon of New Zealand’s currency reaching parity with the U.S. dollar. Rather, what’s interesting for New Zealand is the extent to which it is a direct beneficiary of Australia’s good fortune. Australia is this country’s biggest export market, followed by China. The relative weakness of the New Zealand economy has pushed the kiwi dollar to a 10-year low against its Australian counterpart, which is great for those exporting across the Tasman.
The big question is whether this signals a fundamental realignment of the trans-Tasman currencies’ relative value.
The evidence would suggest that it is, given how much stronger the outlook is for Australia than New Zealand.
Meanwhile, the forces currently driving global forex markets look likely to remain intact for a while yet, with the U.S. Federal Reserve signaling it will try to maintain economic recovery by returning to some level of quantitative easing, otherwise known as printing money, in coming months.
The ripples from this speculation have touched every part of global markets as investors jettisoned the greenback in search of higher returns. This has added fuel to the so-called “currency wars”, which boil down to the rich world trying to devalue its currencies in pursuit of recovery while developing countries are reluctant to let theirs rise.
Despite intense criticism from Washington, China is resisting a stronger yuan, even though its economic strength warrants it. China has the world’s largest foreign exchange reserves at US$2.65 trillion and the fastest-growing major economy. Its wealth allows the U.S. to go on borrowing, knowing it has a ready buyer for Treasury bonds.
However, that may not last. If the Federal Reserve does print more money, global capital will be looking for a better home than the greenback. Some of the hot money in search of yield will flow to the Australian dollar, lured by a central bank rate of 4.5%, versus close to zero in the U.S.
A smaller portion will likely find its way to the kiwi dollar. That’s likely to make Reserve Bank Governor Alan Bollard content to hold off on lifting the official cash rate from its current 3% any time soon.