Tuesday, July 24, 2007

Australian Dollar Blown Up by Greenhouse Gas

A very insightful commentary by Terry McCrann writing for The Australian:

...The somewhat more complex question is why demand for the Aussie has been so strong. Every other time we've had big deficits we've had a weak currency.

They were beginning to look endemic -- hence those less than flattering terms in the opening paragraph.

The answer is, of course, China, with again a little bit of help from the RBA. Not in the currency market but in setting official interest rates in Australia, and hence the bank borrowing rates which have been the principal means of bringing that foreign money into Australia.

...Enter the paradox. The core driver of our rising dollar -- and pretty much everything else in and around our economy -- is the explosive growth in China's demand for, and consumption of, commodities.

Principally, so far as we are concerned, iron ore to make steel and coal to generate power. Along with pretty much everything else -- globally importantly, oil and copper.

In short, not to put too fine a point on it: our dollar is pivoting on a truly momentous eruption of greenhouse gases. Yet we and the world are -- at least hypothetically -- committed to not just capping that eruption, but reversing it.