Editorial:

Exchange rates are economic & political

The steady rise of the currency exchange rate relationship of the 
Australian dollar to the US dollar has a number of causes, not the least 
being the decline of the US dollar against other world currencies.

Currency exchange rates are not just an economic question but are also a 
political matter.

The three main currencies of the industrialised countries are the US 
dollar, the European Euro and the Japanese Yen. Another currency that is 
steadily becoming of more importance in world trade is the Chinese Yuan.

The ebb and flow of currency exchange rates has a big influence on world 
trade. For example, as the value of the Australian dollar relative to the 
US dollar goes up, imports of goods and services into Australia become 
cheaper. Fewer Australian dollars are needed to pay for them.

On the other hand, Australian exports become more expensive to importers in 
other countries and they are less inclined to buy Australian commodities. 
Importers in other countries will look elsewhere to buy what they need.

In the last year or so, there has been a major trend in the exchange rate 
relationship between the US dollar and the Euro. The value of the US dollar 
has been declining while the value of the Euro has been increasing.

This actually helps the US economy to the extent that US manufactures and 
services become cheaper on European markets and those of the European 
countries become dearer on US markets.

However, it also means that investors are less likely to send their 
investment money to US banks and, if they have invested in the past, they 
may be inclined to take their money out of the US and make a profit out of 
the exchange.

An enormous amount of money is sloshing around the world being used to 
speculate on exchange rate variations between the major currencies. 
Sometimes the exchange rate differences are tiny but, when multiplied by 
huge sums, actually translate into very big profits.

One reason for the greater demand for the Australian dollar at present is 
that money invested in Australian banks earns an interest rate higher than 
that available in the US, Japan or Europe.

For many years the Australian dollar was government controlled but it was 
"floated" in the early 1980s by the Labor Government's Treasurer Paul 
Keating. Floating the dollar meant that it became the plaything of 
international speculators who can make or break pretty well any currency.

When it was at its lowest the Australian dollar was worth only about 50c to 
the US dollar. In the 1970s, before the Australian dollar was floated, it 
was about equal to the US dollar, that is, 100c Australian would buy 100c 
US.

The Chinese government is much wiser and has refused to float its currency 
on the open market thereby enabling it to control more effectively the 
terms of trade between China and other countries. It also protects the 
currency against speculators.

In the 1990s the currencies of a number of Asian countries crashed as a 
result of speculation by US multi-millionaire speculator, George Soros. 
However, because it was largely government controlled the Chinese currency 
weathered the storm.

Furthermore, China was able to substantially help other Asian countries 
because China's currency and China's trade relations with other countries 
remained stable.

What needs to be watched now is the decline in the value of the US dollar 
and the rise in the value of the Euro. This can have a devastating 
consequence for the US economy if more countries cash in their reserves and 
investments held in the US and convert them into Euros.

A number of countries have already taken this step. In fact one of those 
countries was Saddam Hussein's Iraq. That was undoubtedly a factor that 
impelled the US to invade Iraq. What if other Middle Eastern countries were 
to follow the Iraqi example?

Venezuela has also opted out of the US dollar net to some extent by making 
barter arrangements for sale of their oil with other Latin American 
countries.

Some countries will undoubtedly take this step as a means of making a 
political protest against the foreign policies being implemented by the 
Bush administration.