Australia: More Greenbacks for Kangaroo Jack

The growing tensions in the Mideast have created an unlikely beneficiary: the Australian dollar. Since August, 2002, the Aussie dollar has soared 10% against the U.S. dollar, to a 2 1/2-year high of about 59 U.S. cents.

The Australian currency is seen as a safe haven for investors hoping to avoid potential turmoil in financial markets if the U.S. invades Iraq. In addition, the nation enjoys one of the most favorable outlooks for economic growth. Real gross domestic product is expected to grow 3% to 3.5% this year, after probably expanding by just under 4% in 2002.

Domestic demand is fueling growth. The nation's retail organization said store sales rose 4% in December from a year ago. And homebuilding is surging, thanks to relatively low interest rates and government subsidies.

Solid fundamentals are supporting consumer spending. Jobs increased by 52,100 in December, making 2002 the strongest year for hiring since 1989. The unemployment rate, at 6.2%, is near a 12-year low, and consumer confidence in January rose for the third month in a row.

The gains in retailing and housing have offset declines in exports and agriculture. Exports have been hurt by falling commodity prices and the slowdown in the U.S., Australia's largest trading partner. Meanwhile, the worst drought in a century has drastically curtailed farming and ranching. And deadly wildfires are spreading.

Despite the rapid gains in demand, inflation is quite tame. Consumer prices in the fourth quarter were 3% above their year-ago levels, little changed from the 3.1% rise for all of 2001.

Instead of watching inflation, the Reserve Bank of Australia is focusing more on the surge in mortgage lending. If housing remains strong in early 2003 and if the global economy begins to recover, the RBA is likely to lift its policy interest rate, currently at 5.25%. But higher rates will only make the Aussie dollar more attractive, ensuring a continued rise in the exchange markets.

By James C. Cooper & Kathleen Madigan

    Before it's here, it's on the Bloomberg Terminal.