The strong Aussie dollar a white knight for borrowers

By webmaster 16 October 2010 | 1 minute read

The surge in the Australian dollar has been all over the news, but what does it really mean for the end consumer – in particular home buyers?

The Australian dollar reached its highest level since the currency was floated in 1983 overnight, soaring to 99.29 US cents. This follows several weeks of the Australian dollar edging ever closer to parity with the mighty Greenback.

According to Shane Oliver, AMP chief economist, Australia’s terms of trade is now running around levels last seen in the early 1950s, when one Australian dollar bought $US1.12.

With the terms of trade so high and Australian interest rates well above those in the United States – and likely to rise even further – a sustained rise above parity is likely, Mr Oliver says.

The ramifications of the surge in the Aussie dollar will be both good and bad, depending on who we’re talking about.

According to Mr Oliver, manufacturers and companies that compete internationally will suffer as a result, but consumers – that means you – will benefit.

This benefit will come in the form of better pricing on imported items such as electronic goods, clothes and cars as well as cheaper offshore holidays.

But the strong dollar may mean even more for consumers than just cheap holidays.

To the extent that the strong Australian dollar helps control inflation, it will also do some of the RBA’s work for it, Mr Oliver explains, and so interest rates may not need to rise as much as might otherwise have been the case.

In any case, we remain in a rising interest rate cycle, and aspiring property buyers should still anticipate home loan rates to increase in the short to medium term.

With confidence in the continuation of the global recovery likely to improve in the months ahead, and the Australian labour market remaining very strong, Mr Oliver says further tightening of monetary policy is likely before year end, most likely next month.

The strong Aussie dollar a white knight for borrowers
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