Strong Aussie Economy Supports the Dollar

The dollar continued to climb this week as strong Aussie economy supports its currency.

Peter Lavelle - 2.08.2012

Rate changes this week, the 26th July to 2nd August 2012:

  • AUD to GBP: 0.6625 to 0.6750 (+1.887%)
  • AUD to EUR: 0.8462 to 0.8566 (+1.229%)
  • AUD to USD: 1.0395 to 1.0513 (+1.135%)

What's happened to the exchange rates this week?

As you can see above, the Australian dollar enjoyed an outstanding run this week, gaining not just against the pound but the euro and US dollar too. In fact, today's rate against the euro takes the Aussie dollar to within a whisker of its all-time high against the common currency, of 0.8588, which it reached just a fortnight ago.

In addition, this isn't just a one-week climb for the AUD. Instead, the Australian currency has enjoyed consistent gains against all three of these currencies since May, claiming up to eight cents. This tells us we're looking at a medium-term trend here. So how come the Australian dollar can't seem to stop gaining?

  1. The Australian economy is still doing well.

    There's been much talk this last week of Australia mining boom coming to an end, as demand from China peters out. That in turn could mean Australia's domestic economy takes a hit. Yet, judging from figures this week, that's not yet the case.

    Australia enjoyed a trade surplus of AUD +$9m last month, beating forecasts for a AUD -$347m deficit. Now, granted +$9m is not a huge surplus. But it's some -$355m better than the markets had in mind, suggesting the mining boom still has some way to go. That then supported the dollar.

    What's more, the non-mining parts of the Australian economy also came up trumps this week too. Retail sales jumped +1.0% in July, ahead of forecasts for a +0.7% climb. That means Australian shoppers spent more on the high street that the markets thought likely, telling us (as I mention) that Australia's domestic economy is resilient. That too shored up the dollar.

  2. Australia offers high returns for global investors.

    The second reason the Aussie dollar is still climbing is that it's one of an increasingly small number of countries that offer good, secure returns for global investors.

    Currently, there are just seven nations on earth rated 'AAA Stable' by the three rating agencies, and Australia is one of them. Not even the United States nor Germany can match that. For people looking to invest in government bonds, Australia hence looks very safe, which is vital.

    In addition, the Reserve Bank of Australia still boasts an interest rate of 3.5%. Compare that to the UK, Eurozone or US, where central banks cut rates to less than 1.0% in the last four years, to fuel the recovery. It means that if you want a high return on your investment, Australia offers rates that are several times better.

Given all this, there's no reason to think the Aussie dollar won't continue to climb in the next week.

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