Australia’s currency reached parity with the U.S. dollar for the first time since exchange controls ended in 1983 as the biggest mining boom in a century and U.S. stimulus prospects spurred demand for the nation’s assets.
The so-called Aussie gained the most among the greenback’s 16 most-traded counterparts over the past three months as China’s demand for Australian coal and iron ore helped drive economic growth to the fastest pace in three years. Parity was reached after Federal Reserve Chairman Ben S. Bernanke said today that additional monetary stimulus may be warranted.
“The Australian dollar is undergoing a significant structural appreciation as the China-driven commodity price boom boosts Australia’s economic growth rate and delivers record trade surpluses,” said John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney.
Australia’s dollar fetched 99.77 U.S. cents as of 1:30 p.m. in London, from 99.42 cents yesterday. It rose as high as $1.0004, the most since the currency was freely floated in 1983.
The median estimate of analysts polled by Bloomberg News is for the Aussie to trade at 95 U.S. cents by year-end. Banks including Credit Suisse Group AG and Wells Fargo & Co. forecast the Aussie will remain at or above parity through 2011.
Controls on the currency ended on Dec. 12, 1983, and it closed trading that day at 91.75 U.S., according to the Reserve Bank of Australia. It was last equal to its U.S. counterpart on July 28, 1982, when the Aussie was pegged to a trade-weighted basket of currencies.
The Aussie is heading for its ninth week of gains, the longest stretch of advances in more than a year, as speculation intensifies that the Fed will boost bond purchases.
“There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks given at a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”
Treasury two-year yields dropped to a record low on Oct. 12 after minutes of the Federal Open Market Committee’s September meeting showed it was ready to expand credit-easing steps “before long.” The yield advantage offered by benchmark Australian government debt maturing in 2012 reached 4.53 percentage points more than similar-dated U.S. securities on Oct. 7, the most since June 2008.
“In the near term, Fed easing expectations will keep the U.S. dollar weak,” Mansoor Mohi-uddin, the Singapore-based head of global currency strategy at UBS AG, wrote Oct. 11 in a note to clients. “The two currencies that seem to be the best near-term bets for dollar bears ahead of the November FOMC meeting are the Australian dollar and the Swiss franc.”
UBS forecasts that the Reserve Bank of Australia will raise rates when policy makers meet Nov. 2.
Then-Prime Minister Bob Hawke and his Treasurer Paul Keating oversaw the decision to eliminate foreign-exchange controls and announced early in December 1983 that they were ending the Australian dollar’s peg to a basket of other currencies.
Hawke and Keating floated the Aussie as part of financial reforms which included licensing foreign banks to operate in Australia and ending direct regulation of interest rates, according to the Australian government’s website.
Hawke, who won a Guinness Book of World Records award in 1954 for drinking a so-called yard glass (2.5 pints) of beer in 11 seconds, took office in March 1983 after defeating Liberal Prime Minister Malcolm Fraser in national elections.
The Aussie dropped by about a third within three years, hitting a then-record low of 59.80 U.S. cents on July 31, 1986, less than three months after Keating warned Australia could become a “banana republic” unless it strengthened the nation’s manufacturing industries.
The currency reached as high as 98.50 U.S. cents in July 2008 before falling to as low as 60.09 cents three months later as the collapse of Lehman Brothers Holdings Inc. froze credit markets and prompted investors to dump riskier assets.
Australia’s dollar has become a favorite for traders because of the country’s relatively high interest rates. The central bank has raised its benchmark borrowing rate to 4.5 percent from 3 percent over the past 12 months, as the Fed and European Central Bank kept theirs unchanged at all-time lows. The Bank of Japan on Oct. 5 cut its rate to “virtually zero.”
The Australian currency’s gains accelerated over the past month on speculation the Fed will act to revive the U.S. economy with bond purchases, so-called quantitative easing.
The Fed snapped up $300 billion of Treasuries last year. It said Oct. 13 it would buy about $32 billion of U.S. government debt over the next month.
The Aussie passed the Swiss franc to become the world’s fifth most-traded currency in April, according to the Bank for International Settlements’ Triennial Central Bank Survey released Sept. 1. It accounts for 7.6 percent of daily trading though Australia makes up 1.6 percent of world gross domestic product.
Twenty percent of Australia’s economy derives from exports, led by iron ore and coal to countries including China, the island nation’s largest trading partner.
Australia’s dependence on commodities need to be reduced to broaden a “patchwork economy” where regions exposed to mining boom while others go backwards, Prime Minister Julia Gillard said on Oct. 12. The strong currency is hurting manufacturers and farmers, she said, parts of the economy that need to solidify so growth can be sustained in years ahead “without putting upward pressure on inflation and interest rates.”
Links with fast-growing markets, whose demand for commodities have spurred prices higher, helped Australia skirt a global recession after Lehman’s failure. Its economy expanded 1.2 percent in the second quarter of 2010, the quickest pace in three years and sending the jobless rate to almost half the level in the U.S.