Tuesday, December 1, 2009

The Aussies have it right





I should be outside enjoying the sun and the beautiful rolling hills, but I thought a tribute to the Aussie central bank was warranted. Today they raised their target rate for the third time in three months, to 3.75%. As a reward for their proactive stance against inflation, and for the fact that they have kept rates much higher than the Fed for quite some time—being more concerned about inflation than the economy—the market has bid up the Aussie dollar to a fairly strong level against the U.S. dollar, as shown in the second chart. Indeed, relative to its purchasing power parity against the U.S. dollar, the Aussie dollar is now as strong as it has ever been. As a side note, over the past three years, commodity prices have risen almost 20% in US dollar terms, but they are flat as far as the Aussie dollar is concerned. This is another way of seeing how dollar weakness in recent years has been due to easy money, with the next shoe to drop being rising inflation.

1 comment:

Jeff V said...

Scott,

Being long gold and the Aussie dollar (through govt bonds), I'm feeling pretty good (except for the fact that all my other dollars are loosing value thanks to Bush/Obama weak dollar policy).

However, I waiver on weather this continues (80% probability) or weather we start reverting back to some norm (20%). My 4% from the Australian govt will get eaten up really fast if the dollar changes directions. What prevents the dollar index from hitting 60? (a 20% move down from here)