ISIS Strikes The Aussie Dollar

19 Sep 2014

The Australian dollar has plummeted to a six-month low and could fall further if investors are given more reasons to buy the greenback.

Last week, the local currency was trading at 91.56 US cents, down from 92.69 cents on Tuesday.

The Australian dollar dropped more than one US cent, falling as low as 91.17 US cents on Wednesday, its lowest level since March 24, as the US dollar continued to surge.

However, news this morning confirmed the Australian dollar was trading at US89.91c, up from 89.57c on Thursday meaning the local currency is regaining some ground following its fall on suggestions the US could experience more interest rate hikes next year.

Senior Lecturer of Economics at The University of Queensland, Dr Bruce Littleboy, believes the Australian Reserve Bank has some serious concerns regarding the high dollar.

“The economy is in a slump, and it appears to be worsening. A strong dollar restricts exports and is a barrier to recovery,” Dr Littleboy said.

“If the dollar weakened, stimulus would be applied without the need to cut interest rates which are already at record lows.”

With this in mind, after the Reserve Bank's quarterly statement was released, some experts blamed the continued tensions in the Middle East, particularly the US’ launched airstrikes in Iraq.

Senior currency strategist, Michael McCarthy, has recently blamed the US’ air strikes against ISIS rebels in Iraq for “hitting the Aussie dollar hard” but Dr Littleboy believes this is “welcome news for the Australian economy”.

“I’ve recently read that the dollar is held to be a ‘safe haven’ in troubled times, so the dollar may bounce in either direction depending on how disruptive international events are interpreted,” Dr Littleboy said.

“Of course, the connection between salient news events and gyrations in foreign exchange markets is tenuous and transient. The dollar changes in price, and people are asked by journalists what ‘the’ cause is.”

“I’d like to see the steps in McCarthy’s chain of reasoning before commenting on how persuasive I find it.”

However, official data out of China showed exports jumped 14.5% last month, however the Australian dollar didn’t seem over interested but Dr Littleboy doesn’t think this will have any major long term effect.

At any moment there are pieces of news liable to strengthen the dollar and others liable to weaken it. It appears that there may be a balance of forces such that neither bullish nor bearish sentiments are triggered overall,” Dr Littleboy said.

“If the situation is ambiguous, people wait anxiously for further news to clarify the subjective picture they have (and are likely to over-react to the extra information).”