Will the Australian dollar slump help trade?

Thursday, 20 June 2013  Media Alerts

A loss of confidence in the Australian economy has seen the Aussie dollar slump below 93 US cents for the first time in three years - and Tim Harcourt, the JW Neville Fellow in Economics at UNSW's Australian School of Business says that this rate will be here to stay, giving an overall boost to trade.

He says the threat of a prolonged recession in the US and Europe appears to be lifting, with stimulus measures there being removed - at the same time as Australia's global prospects look rockier.

"Agricultural exporters and domestic tourism were the most adversely affected by the high level of the dollar. These areas will get a major boost now. And it will give retail a decent uplift - online imports are now much more expensive, resulting in many more shoppers visiting real stores."

He has studied the impact of the dollar on trade, and before joining UNSW was chief economist at the Australian Trade Commission (Austrade). "With exchange rates we often hear that the high dollar is killing manufacturing. Seventy four per cent of all exporters now import, compared to only thirty five per cent two years ago. However the exchange rate impact on trade is greatly exaggerated. Most large businesses "hedge" on exchange rates - this will impact them less than you expect."

The Australian dollar has fallen to its lowest level for almost three years, dipping below 93 US cents after the US Federal Reserve said it could begin scaling back stimulus measures. Tim Harcourt said "it is a snowball effect for the Aussie dollar where there are many more reasons for it to continue going lower if the Fed continues its present action."

"This will give a strong downward bias on interest rates. As a member of the RBA Shadow board I've been expecting them to fall for a while, and it is clear that the RBA will cut again."

Tim Harcourt responded to forecasts by Merrill-Lynch's Chief Economist Saul Eslake that Australia has a 25 per cent chance of falling into recession. He said "There is a danger here, but manufacturing exporters have the highest profit expectations of all sectors with 52 per cent expecting an increase this year compared to 42 per cent of mining exporters. The slump in the dollar will only boost that, and policy makers have many options on the table to avoid more of a downturn. The need for Quantitative Easing Down Under is still very remote at this stage."

For further comment call Tim Harcourt on 0408 485 479, or Email tim.harcourt@unsw.edu.au

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