The Aussie dollar just can’t seem to catch a break. Just when it seems like there’s enough gloom to send it falling, someone comes in and spoils the party. Overnight the local currency gained a full cent against the US greenback, climbing from US$76.1 to US$77.2.
That will worry the RBA. Both the RBA and the government see a weaker AUD as a key way to promote growth by boosting exports. But they can only do that if the USD retains its current position of strength, as it’s one of the main factors pushing downward pressure on the AUD.
So why did the Aussie dollar trend upward overnight? Its unwanted rise came on the back of comments from none other than US President Barack Obama himself. Speaking at an economic conference in Munich, Obama is reported to have said that the US dollar’s recent strength was ‘a problem’.
That caused the USD to drop slightly — signalling to the market that the US really has no interest in maintaining a stronger dollar. That’s a turnaround from previous statements pointing to the contrary. Obama simply let slip that a strong dollar isn’t good for the US economy.
And it has been very resilient recently, rising by 7% in value since the beginning of the year. That’s despite poor US economic data coming out in the past few months.
The reason why Obama feels concerned about the greenback’s strength is because it negatively affects a potential US economic recovery. Why? Because the US will need its exporting sector to relieve pressures facing the economy.
Consumer consumption is slowing, lowering the likelihood of a consumer driven rebound. That’s not much of a surprise, since wages in the US are sluggish, growing at about 2% a year. That’s not enough to kickstart a consumer spending spree that could create new jobs.
So that leaves exports as a potential driver of growth. But exports won’t grow if the USD remains so strong. And with favourable — near zero — interest rates the US has fewer options to boost exports through monetary policy.
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So why can’t they lower the US dollars value? What is it that makes it so resilient?
There are two answers to this, and both are valid. It’s clear the USD gains some of its strength as a result of its world currency status. Trading nations need the USD to buy most goods, so they store USD reserves. As a result, investors see USDs as a safe haven, partly due to this special position it holds in world trade. And it certainly looks special if we judge it against other currencies.
Compared to the Eurozone’s woes, and China’s slowing economy, the US dollar’s strength may merely reflect its appeal as the lesser of many evils.
Yet there is another, equally important, reason that the US dollar remains so strong.
The rumours of an interest rate rise in America aren’t going away. Many economists are now predicting it could come as early as September this year. At least, the chance of it taking place before the end of the year looks increasingly certain.
A stricter monetary policy would drive up the US dollar further. It would be the first shift away from a US policy of easier credit since the GFC. These rumours are contributing to its strong position. That makes it easy to see why markets are keeping faith in the greenback.
US officials deny Obama’s stance on the strength of the greenback
Not surprisingly, the US government denied that Obama made any mention of the US dollar. Instead, they point out that Obama only appealed to other nations to use fiscal and monetary policy to promote growth amid weaker global demand. But where there’s smoke, there’s fire.
The US might publically say that they prefer to see a stronger dollar. But the problem is that America needs to find new avenues of growth. Right now, it’s not coming from consumers. Even if a stronger dollar is beneficial for consumers, it’s only contributing to America’s worsening trade deficit. In turn that’s adding to the US’s growing pile of national debt, which has blown out to an unimaginable US$17 trillion. So what about exports then?
That would be the sensible way to close the trade deficit gap down. But as we’ve seen, a strong dollar is preventing the country from exporting their way to growth. Exports make up roughly 30% of America’s total GDP, so there is clearly room to increase that share. It’s the simplest way for the US recovery to gain some momentum — if the US dollar could budge from its position of strength that is.
Obama may be right about weak global demand, but the dollar is a big problem for the US. They can deny it all they want, but it’s clear to see that officials have every right to be concerned about its harmful impact on any potential US recovery.
Contributor, The Daily Reckoning
PS: The US is not the only nation struggling to find a balance between exports and economic prosperity. The RBA hopes that a strong US dollar — and a weaker Aussie dollar — will be the tonic to lift Australia’s struggling economy. But with the trade deficit rising in Australia, it may not be enough to prevent a longterm decline.
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