Australian Dollar Climbs Thanks To Haven Status

02 August 2012 03:00 - Lucy Williams

Australian Dollar Climbs Thanks To Haven Status

The Australian dollar has made gains as the currency is considered a safe haven. The currency continues to climb against other major currencies including the US dollar and the Euro despite sharp declines in commodity prices especially in resources such as iron ore and coal. In a recent conference Reserve Bank of Australia Governor Glenn Stevens recognised the important role of the Australian dollar particularly during a financial crisis but also told listeners that in the event of a serious slump in China’s growth the Australian dollar would be badly affected and most likely fall.

Nevertheless if this were to happen the Australian domestic economy would receive the boost that it so desperately needs thanks to a lower exchange rate. If Chinese economic growth does slow the currency falls and trading sectors would benefit from a lower exchange rate. Stevens also touched upon another scenario where if there was another financial crisis such as further issues in the Eurozone Australian assets would see a larger flow of funds. However this could produce problems as Stevens highlighted “in that case our problem might be not being able to absorb that capital”.

Commodity prices fell with Australia’s biggest export iron ore falling to two and a half year lows. Iron ore is now priced at $115 a tonne possibly as a result of worries over the Chinese steel demand. Economists have cited three main explanations for the current strength of the Australian dollar these being firstly Australia’s triple A rating with a stable outlook, secondly statistics shows the resilience of the economy as the country’s gross domestic product growth has expanded by 4.3 percent, unemployment remains at 5.2 percent while inflation comes in at just 1.2 percent. The country’s GDP growth figure has made Australia one of the world’s strongest-performing developed economies. Finally Australia has fairly high interest rates with the official cash rate at 3.5 percent.

Speculation of further quantitative easing by central banks in Europe, the UK and the US is benefitting the value of the Australian dollar. The currency is becoming increasingly popular as central banks and sovereign wealth funds move away from traditional reserve currencies including the US dollar and especially the euro.