Why is the Australian Dollar trading at such a high price?
by Hamish McDouall, 26/04/2007

Over the past twelve months we have seen the Australian Dollar, relative to the USD, increase by 13% climbing to a 17-year record high of up to US 84.00c.

So, what drives the Australian Dollar?

In order to either invest in Australia, or buy Australian goods, foreign countries must first buy Australian dollars. For example, similar to when we (as Australian’s) travel overseas, we must first buy the foreign currency to pay for food, accommodation, transport etc. In which case we are selling Australian dollars and buying the foreign currency.

The Australian Dollar will rise and fall compared with other currencies due to the underlying demand and supply of the respective currencies. Therefore, the greater the demand for Australian Dollars the more it will increase and the greater the supply the more it will decrease.

At present there are two much publicised economic conditions that are driving the demand for Australian Dollars, and they are:

• High interest rates; and,

• The resources boom;

Interest Rates

Following three successive interest rate hikes last year, the RBA’s cash rate now stands at 6.25%, which is 1% higher than the US cash rate of 5.25% and 5.75% higher than Japans cash rate of 0.5%.

A high level of domestic interest rates, compared to other stable developed economies interest rates, means that more investors have been moving their cash investments into Australia. It makes sense, i.e. would you choose to deposit cash in a bank paying interest at 6.25% or a bank paying 0.5%?

Resources Boom

Similarly, with metal prices at record highs and continued demand for Australia’s commodities such as iron ore, zinc, copper etc, foreign countries are being required to outlay more to purchase our resources. Again, in order for foreign countries to buy Australian goods they must first buy Australian dollars with which to purchase these goods, hence increasing the demand and therefore the price of the Australian dollar.

These, amongst others, are two reasons for the strength of the Australian dollar.