Australian Dollar on the Road to Parity With U.S. Dollar

The Australian dollar keeps getting stronger. With further rate cuts in the US and rate rises in Australia, it may not be long before the Australian dollar reaches parity. "Anyone who likes the Canadian dollar for its resource-rich and balanced-budget economy should be embracing the Australian dollar for the same reasons and the additional prospect of rising interest rates, according to the bond market's biggest international investors," says Wes Goldman at Bloomberg.

"Even after the so-called Aussie reached a 23-year high against the US dollar last week, investors say the rally is unstoppable amid record exports and unprecedented prices for coal and iron ore. The currency is getting an additional boost from the Reserve Bank of Australia, which shows no inclination to relax a monetary policy focused on curbing inflation."

Well, nothing is ever unstoppable in investment markets. But it is hard to imagine anything short of geopolitical catastrophe reversing the downward trend of the American dollar. But Rome didn't decline in a day either. These things take time and move in cycles. Parity is the next move for the Aussie dollar. And beyond that, who knows?

The U.S. Federal Reserve had a choice one month ago. It could support the value of the US dollar-which is the Fed's paramount institutional responsibility-or it could ease the burden on borrowers and lenders in the States by lowering rates again. It has taken the path of least resistance and maximum political appeal by lowering rates.

The new highs in the stock market are the modern equivalent of Roman circuses. It's a massive fraud designed to convince people they are getting wealthier. The Dow can rise in nominal terms. But the decline in the American dollar and in America's international financial position means Americans face years and years of paying back the money their government has borrowed.

It also means international investors can acquire American assets on the cheap. This might account for some demand for stocks on Wall Street. But fundamentally, we see the American stock market as a massive diversionary sideshow to the better growth opportunities found in this neck of the woods.

"Should we sell to the Chinese," asks John Garnaut in yesterday's Sydney Morning Herald. "China's US$200 billion sovereign wealth fund is officially nine days old and Australian companies have already been earmarked as the fund's most likely investment targets in the Western world."

High praise, indeed, but not at all surprising. Tangible resource wealth is Australia's great strategic asset, and China's great strategic weakness. "Australia has world-class resource and mining companies that China's industrial-minded leaders are desperate to have a stake in. But the reason it [Australia] has stayed on the list, when equally compelling investment destinations have been scratched, is that Australian politicians have not reacted with the reflexive fear and antipathy towards Chinese capital that has become common in the US and Europe."

Your money is good here, China. Come on in.

Dan Denning
The Daily Reckoning Australia

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