- As Go Australian Interest Rates, So Goes Their Dollar

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As Go Australian Interest Rates, So Goes Their Dollar

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As Go Australian Interest Rates, So Goes Their Dollar

Wednesday, 03 September 2008

By Charles Delvalle
One of the most impressive currency rallies over the last eight years has been that of the Australian Dollar. After years of being highly undervalued vs. the US dollar, it nearly reached parity late last year, but future gains will be harder to come by.
You see, even though the Australian economy is expanding nicely, inflation has taken a toll and hurt retail spending and business confidence. Yet even with this inflation, it looks like the slowdown that started in the US during August of last year, is finally making its way east.

As US demand slows, economic growth in China follows. As the economy in China slows, Australia should see demand for commodities slow down as well. This projected slowdown is one of the biggest reasons why on Monday, Australia cut their benchmark interest rate for the first time in seven years.

These fundamentals – a slowing economy combined with less interest earned in Australian money – should cause the Australian dollar to lose strength vs. the US dollar in the future.

For now, you should expect any dividend payments by Australian companies (like BHP Billiton (BHP) and Rio Tinto (RTP)) to drop slowly as the currency conversion rate moves less in your favor.

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