ONLY four weeks after Paul Keating took over as Australia's prime minister, investors are devaluing the Australian dollar.
Within the past week, the Aussie currency has fallen 3.9 percent, hitting a four-year low. The Australian Reserve Bank, the central bank, has been trying to keep the fall orderly by buying the currency as it drops. On Friday, the Australian dollar had fallen to US$.74 compared to US$.77 early in the week.
The drop will benefit such Australian exports as wheat, wool, gold, and coal. It will also make Australia a more attractive tourist destination since hotels and other services will seem cheaper to foreign tourists. But the items that Australians import, including clothes, food, and airplanes, will become more expensive.
Economists and currency traders believe it's likely the Aussie dollar will fall still further. "There's very few reasons to buy the [Australian] dollar at the moment," says Harry Rozenstein, a financial markets economist with the Commonwealth Bank in Sydney.
The currency, stable for the past two years, is now falling for a variety of reasons. The Reserve Bank is lowering interest rates to try to stimulate its recession-ravaged economy. Last week, the bank lowered its cash rate - the interest charged on overnight money - by 1 percentage point to 7.5 percent. It was the 11th rate cut since the downturn began. The drop in rates was quickly reflected in mortgage rates, which were reduced to 11 percent.
Australian interest rates now are not as attractive as rates in Germany, for example. "The Australian bond market was a very healthy buy but that is no longer the case," says Steven Miller, senior economist at Bankers Trust Australia.
At the same time that the Reserve Bank is lowering rates, the new Keating government is considering fiscal stimulation of the economy. In a Cabinet meeting last week, John Dawkins, the new treasurer, reportedly indicated the economy is in worse shape than expected and would need additional stimulus. The government is expected to announce a new jobs programs in February when it presents a mini-budget to Parliament.
If the government overstimulates the economy, Australians could face inflation. Mr. Rozenstein says there is a danger the Australian economy could emerge from its deep recession more quickly than the rest of the world emerges from its shallow recession.
"This would put more pressure on our trade accounts as our imports will rise more than our exports," says Rozenstein.
Only last week, the government reported the current account deficit in November jumped $300 million (Australian; US$222 million) to A$1.7 billion. Exports were up 6 percent, but imports rose 10 percent.
Economists are concerned about the high level of imports at such an early phase in the economic recovery.