April 4 (Bloomberg) -- Australia must face up to the challenge of a strong currency, Prime Minister Julia Gillard said as she prepares for talks with the new leadership of her nation’s biggest trading partner, China.
“The sustained strength of our dollar is now a feature of the economic landscape,” Gillard told a forum in Sydney today. “But like Germany under the towering Deutschmark in the days before the euro, a high currency need not be a barrier to making products and services of such quality that our partners still want to buy them.”
Gillard begins a five-day visit to China tomorrow that will promote trade, investment and education, and will meet with President Xi Jinping at the Bo’ao Forum and Premier Li Keqiang in Beijing. She said today the trip reflects “our high-level political oversight of that relationship” and comes on the 40th anniversary of the first visit to China by an Australian prime minister, her Labor predecessor Gough Whitlam.
The Australian currency has averaged about 30 U.S. cents higher in the past two years than in the prior decade, and remained above parity with the U.S. dollar for more than nine months, its longest stretch over the threshold since the Aussie was freely floated in 1983. The appreciation has been driven by Chinese demand for Australian raw materials and investors fleeing fiscal and financial crisis in Europe.
Gillard plans to sign a deal next week to allow direct conversion of the Australian dollar into the Chinese currency, according to an Australian government official, who asked not to be identified before the announcement.
Currently, companies exporting goods to China have to convert the Australian dollar into U.S. currency or yen, and then into yuan, incurring extra charges. The Australian newspaper on March 30 first reported news of the planned deal.
The Aussie’s strength “may persist for some time given Australia’s status increasingly as something of a safe haven currency,” Gillard said today.
While the resources boom has made Australia one of the fastest-growing economies in the developed world, Gillard’s government isn’t getting a lift in opinion polls as the currency’s resilience bankrupts manufacturers, discourages international tourism and hurts retailers as consumers shop online.
The ruling Labor party’s support was 42 percent on a two-party preferred basis, while the opposition Liberal-National coalition’s was 58 percent, the biggest gap in almost a year, a Newspoll published in the Australian newspaper March 26 showed.
“While the high dollar has put significant competitive pressure on many industries, the answer to this is not low wages; in a high-skill advanced economy, it should never be,” Gillard told the Foreign Correspondents’ Association.
The Reserve Bank of Australia lowered borrowing costs by 1.75 percentage points in the 14 months through December to 3 percent, partly to offset the currency’s drag on the economy. The reductions benefit households in a nation where almost 90 percent of mortgages have variable rates.
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