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Wed, 12/11/2008 - 17:22

Fall dollar, fall

A lower Australian dollar is good news for international students. Five months ago, the Australian dollar – or “little Aussie battler” as it’s known here – was hurtling towards parity with the mother of all currencies: the United States greenback. Most commentators thought one Australian dollar would soon be worth one US dollar, such was the rising momentum of Australia’s currency.

Australian dollar movements can have a big effect on costs for international students. In fact, when the Australian dollar was nearly US$1, it was feared fewer international students would come here because of higher study and living costs in Australia relative to other countries.

Some care needs to be taken with currencies. For a start, they are ridiculously hard to forecast – nobody really knows where they are going with any certainty. Second, much depends on your own currency, too. The Australia dollar might be falling against the Greenback, but so might your own currency, in turn reducing currency gains

Downtrend

But it does look like the Australian dollar is in a major downtrend and, in Kangaruni’s view, is likely to head lower – possibly below US60 cents before year’s end. This is generally good news for students thinking about studying here as it lowers costs (it’s not good news if you buy lots of imported stuff while you’re here or send money home!).

The Australia dollar relative to your own currency is certainly worth keeping an eye on from time to time

Things can change quickly! After almost touching US$1 (the Aussie got as high as US98.4 cents in mid July) it was spanked all the way back to US60cents before staging a slight recovery to about US67 cents in early November.

Banana republic

Economists expecting parity with the Greenback now believe the Aussie dollar has further to fall, possibly even all the way to its last big low just below US50 cents. (Don’t you just love economists? Wish I had a job where I could get 13 out of every 11 forecasts wrong!!)

Back then, the former Australian Prime Minister, Paul Keating, made his famous “banana republic” comment about what would happen to this country if the currency kept falling. The Aussie probably won’t get that low again, but after several years of rising, the tide has turned.

Why? The Aussie dollar is essentially a “commodity currency”. Overseas investors perceive Australia as a play on commodities price due to the country’s huge mining industry. So when commodity prices fall – as they have been in the last few months – the Australian dollar tends to fall. And the near-term outlook for commodities is pretty average as the world economy slows.

Interest rate

Also, as any economics student knows, the other big factor determining currencies is interest rates. High interest rates usually attract foreign investors seeking higher-yielding currencies, and vice versa. Australian interest rates have fallen sharply in the last few months and some tipsters think the official rate will get all the way down to 3.75% as the government tries to kickstart sagging economic growth.

At the same time, US interest rates are close to bottom – they can’t go that much further before they hit zero! So the attractiveness of Australian interest rates for foreign investors relative to US interest rates is narrowing. This is helping drive the Aussie dollar lower.

All in all, the Aussie dollar has further to fall – and that’s good news for students arriving here.

What do you think?

Tell us about your currency experiences! Have you gone somewhere only to find the currency has risen sharply or collapsed? Kanga Business remembers going to Thailand when the Thai Baht collapsed in the 90s (and eating great meals for less than one Aussie dollar! The money I saved on the food was spent on a diet program when I returned!!)

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