The Australian dollar has roared to a two-year high – and it's more bad news for the economy

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  • The Australian dollar climbed higher this week to buy more than 74 US cents, hitting a 28-month high.
  • It runs counter to what the Reserve Bank of Australia (RBA) is trying to do, suppressing the dollar below the 70 cent mark, in order to boost Australian exports.
  • “Unfortunately, most major economies want to devalue their currency and Australia is, to some degree, a minor player in this competition,” economist Callam Pickering said.
  • Visit Business Insider Australia’s homepage for more stories.

In simpler times, Australians could at least use a strong Australian dollar to afford a few extra days on their next holiday.

With a global pandemic sealing the country’s borders shut, an Australian dollar soaring to a two-year high is unlikely to elicit the same joy.

On Thursday, the weak AUD regained a little of its former glory, buying more than 74 US cents for the first time since August 2018.

Almost two and a half years later, momentum for the AUD has rapidly turned around, moving almost 20 cents higher since its March crash, and struggling back towards its last peak at 81 cents at the start of 2018.

The Australian dollar is finally rebounding. (XE)

Rather than a resounding reflection of the strength of the Australian economy, it is, like the stock market, a far better reflection of the actions of central banks around the world.

“The Australian dollar remains much higher than the Reserve Bank would ultimately prefer. Ideally they’d love a low dollar that would help improve net exports,” Indeed Asia-Pacific economist Callam Pickering said.

The lower the dollar goes, the cheaper Australian exports become for overseas buyers, and the more competitive Australia broadly becomes. While the RBA’s efforts have been valiant, the reality is Australia is fighting an uphill battle.

In his latest monetary statement, Governor Philip Lowe noted that vaccine developments had “lowered risk premiums and supported further increases in some commodity prices”, and helped push the Aussie dollar higher.

It’s not the only force working against the RBA, in its effort to keep the AUD below 70 cents.

“Unfortunately, most major economies want to devalue their currency and Australia is, to some degree, a minor player in this competition. The Reserve Bank’s policy changes in November, likely weighed against their value of dollar but were easily swamped by the looser policy in other major economies,” Pickering said.

The flip side for consumers is that the same American goods that cost them $100 in mid-March, today costs almost $30 less.

The opportunity to stock up on Christmas presents aside, it’s another bad sign for the Australian economy, as Australians are less incentivised to support local businesses.

At the same time that China is going after Australian exports, it’s yet more bad news for the economy, with not even a holiday to make up for it.

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