The ANZ Bank is expecting that further rises in Australian interest rates will see the Australian dollar reach parity in six months. Their international economist, Amy Auster, told a conference in Seoul late last week that the combination of a possible two further rises in official rates in Australia and a weak US dollar would see the Australian dollar soon reach parity with the US dollar. This would result in a high water mark for the dollar, being its strongest value since 1981.
So what does this mean for people in Australia? Well firstly, perceptions of national performance always take a boost from a stronger currency, even if it is not always advantageous to everyone in the country. The most obvious benefit is that overseas travel will be cheaper, as you will be able to purchase more foreign currency in exchange for the Aussie dollar. However, the reverse side of this equation is that Australia is more expensive for foreigners to visit, resulting in loss of income for our domestic tourism industry, which is a major contributor to the economy in a number of states, specifically in Queensland.
From a commercial point of view, it makes imported products cheaper for Australians to buy. Although this is a positive factor from the perspective of consumer choice and competition, it does not encourage people to buy Australian made products, as the prices become less favourable when compared to the cheaper imported goods. This has already revived speculation of a downturn for our already struggling local car manufacturers, who now see increased government support as the only option for survival. If the government opts to support the industry, your taxpayer dollars are falling into a 'black hole' of market inefficiency. If they do not lend support, thousands of workers will lose their jobs, placing further strain both on local communities and the broader economy.
Additionally, a stronger currency increases the cost of our exports overseas, making them less competitive against other products on the market. Although this mainly affects farmers and resource companies, they are often protected by hedge agreements against currency movement. But most importantly for borrowers, a rising currency slows our economy, resulting in downward pressure on interest rates. With two more increases on the cards, as a borrower, the rising dollar may be the only thing running in your favour.