We first heard rumblings of discontent from leaders of emerging market economies around the middle of last year when it looked as though the US was about to commence tapering quantitative easing. These rumblings are likely to get a whole lot louder this time around though, as the impact of US policy starts to bite these economies hard.

The possibility of a Global Emerging Currency (GEC) crisis has grown over the last week with emerging market currencies around the globe such as the Argentine Peso (-5%), South African Rand (-3.6%) and the Indian Rupee (-2.2%) sold heavily in the last week alone. If it continues, as I think it may, then undoubtedly the Australian economy and the Aussie dollar will also be affected.

What’s different this time around?

What strikes me about the recent price action is that unlike previous emerging currency crises, think Latin America in the ‘80s or Asian Currencies during the late ‘90s, the selling does not appear to be geographically specific. This is not just an issue for South America or some parts of Asia, as we have also seen currencies in Europe like the Russian Rouble (-2.6%) and Turkish Lira (-4%) weaken.

This time around the catalyst is coming from one global external source and as such it has the ability to reach all four corners of the globe.
It’s not all down to US QE tapering though. There are some country specific economic factors (e.g. widening deficits or political uncertainty) contributing to the performance of each economy but the markets seem to be driven more by fear at the moment.
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PRIME Minister Julia Gillard says imbalances in the world economy must be tackled by governments embracing floating exchange rates and there is still much talking to be done to keep the Group of 20 nations unified on the issue.

The world’s leading 20 economies, known as the G20, struggled in its most recent meeting to meet consensus on how best to counter imbalances in world growth, and highlighted exchange-rate reform as a key priority.

The US especially has been critical of China’s controlled exchange rate, saying the yuan is being kept undervalued to the cost of the world’s economy.

Ms Gillard, who will meet US President Barack Obama, US Treasury Secretary Tim Geithner and Federal Reserve chairman Ben Bernanke in the US next week, gave her strong support for the US position on the yuan and made clear countries must allow their currencies to float freely.

“We are looking at this currency wars question,” Ms Gillard told The Wall Street Journal and Dow Jones Newswires in an interview.

“The G20 needed to deal with this at the last meeting.

“We believe it’s important that currencies do move to floating regimes, we understand that that takes time but in order for us to have sustained and balanced growth in the world economy we do need to deal with currency questions.”

But reaching and sustaining a consensus will not be easy, Ms Gillard said.

“There is a lot of work to do and a lot of discussions to be had between nations as we build the strength of the global economy and balance sustained growth,” Ms Gillard said.

The Australian prime minister used as an example her own country’s exchange rate, saying letting it trade freely is the right policy even though exporters may be hurt.

The high-yielding Australian dollar reached parity against the US dollar in October for the first time since floating in 1983. The pair traded a post-float record high of $US1.025 in December.

“We have a floating currency and we believe a market treatment system is the right approach,” Ms Gillard said. She highlighted manufacturing, tourism and international education as hurting from the exchange rate.

“Our dollar is reflecting market movements, it reflects the world’s judgement on our currency as a resources currency and our economy having emerged from the global financial crisis strong,” Ms Gillard said.

“If you have a floating dollar it comes with some disciplines, and one of the discipline is it does have some impact on other sectors,” she said.

Outlining expectations for strong domestic growth this year, Ms Gillard said the Asia-Pacific region is the world’s new powerhouse.

“This is the region the world will see dynamic growth in this century, China’s rise obviously is something the world is responding to. We see that as having opportunity for China to be on the global stage in a rules-based system.”

On the topic of consolidation amongst global bourses, Ms Gillard declined to comment on her views on the proposed takeover of ASX Ltd by Singapore Exchange Ltd.

“I want to see Australia continue to be a financial centre for our region. Sydney has played that role and I obviously want it to continue to play that role,” she said.

Asked on the timeline for when the merger, which needs government approval, may win support from politicians, Ms Gillard was noncommittal but hinted at a longer process.

“It is still at the very early stages in terms of the discussions between Singapore and our own exchange. There is some way to go in all of those discussions,” she said.

theaustralian.com.au


The United States delivered a huge gift this week to the Australian tourism industry – the Oprah industry. Sadly, all this pro-Australian enthusiasm is worth little when the Aussie dollar shows no sign of moving too far below parity with the US dollar.

Oprah’s Ultimate Australia Adventure is an extraordinary opportunity to showcase to the world all the tourist highlights we have on offer.

Make no mistake: the 40 million Americans who will see the Great Barrier Reef, Uluru, Whitehaven Beach and Kangaroo Island thanks to Oprah is a wonderful gift to Australian tourism.

”An estimated $62 million in equivalent advertising space in Australian media and $14 million in US media has already been generated since Oprah’s visit was first announced on 14 September,” is the cry from the Minister for Tourism, Martin Ferguson. Putting the quantitative measure to the side for a moment, Ferguson goes on to describe this as plug for Australia as priceless.

In addition to the US viewers, The Oprah Winfrey Show airs in 23 of Australia’s 33 priority tourism markets. But will this translate into an increase in tourism? Sadly, the answer is no.

Australia rates consistently high in surveys of where Americans say they want to holiday, regularly registering awareness of about 90 per cent. However, less than 5 per cent go ahead and make a booking, according to research by Tourism Australia.




If one factors in the dollar at near parity, the reality is that Oprah Down Under is a wonderful bit of publicity, but for Australian airlines and hotels she probably won’t be a nice little earner.

Americans may love Australia, and many dream of coming here but, given the vast majority never venture outside their own country, the Big O is more about bragging rights than anything more meaningful for the local economy.

A far more significant factor in US-based tourism will be the tax cut extension plan agreed by the Obama administration this week. If the US tax and unemployment benefit package becomes a reality and pushes up the country’s debt, then it matters little how appealing the natural Australian treasures are, as the falling US currency against ours will make it far less attractive for Americans to travel to Australia.

The talk show host with the super-charged EQ that has made her a billionaire can change attitudes, opinions and television ratings (and she does great giveaways), but she can’t influence currency exchange rates.

There is nothing on the near-term horizon that will vastly improve the US dollar exchange rate relative to Australia’s currency.

Indeed, the US government is actively attempting to devalue its currency in order to kick-start its economic recovery – as are many other international economies.

Australia is little more than a puppet in the international devaluation race. The relative strength of the local economy, thanks also in part to the minerals boom fed by Chinese demand, is set to dictate our exchange rate for the short and even the medium term.

This week’s strength in the local currency has little to do with local conditions and everything to do with uncertainties in the US.

Having said this, using the Oprah visit to push the merits of Australia is an opportunity that should not have been missed.



Here we go again. As the Australian dollar prepares to punch through parity, the usual howls of protest about the damaging effects on our rural exports already have begun.

The worry, however, is that the misinformed howls are emanating from the alternative government and, given the tenuous political position of the Gillard government, from those who could soon be running the nation.

Each time Australia has enjoyed the fruits of a resources boom in the past half century, the rural lobby has mounted a campaign to hold the dollar at artificially low levels.

Each time it has been successful. And each time Australia has squandered the bounty that should have been delivered through that boom as an artificially weakened currency resulted in massive capital inflows, surging domestic demand and eventually, rampant inflation followed by the inevitable recession.

Often that was exacerbated by overly loose monetary policy and governments embarking on a spending spree to aid re-election.

On those occasions, however, the dollar was set by politicians, not the market. This time it will be much more difficult to cocoon our rural industries from the inevitable pain of a stronger currency caused by a booming resources sector.

Manipulating exchange rates, the way we once did, distorts investment decisions, causes dangerous imbalances and ultimately costs consumers and taxpayers.

That’s what has happened in China. Its currency has been held artificially low for more than a decade. That has boosted its manufacturing base and exports. But China is more reliant on its export sector than it should be, which has crippled the US manufacturing base.

It is the reason behind a global currency war under way between China, the US, Japan and Europe that threatens to blow up into a diplomatic and trade dispute.


Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism.

“Policy makers seemed to be trying to diminish concerns about currency wars,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “There did not seem any commitment to change behavior, however. There is little to suggest that the dollar’s direction is anything but down.”

“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”

Attention now turns to the G-20 meetings, starting next week with finance-minister talks and concluding Nov. 11-12 in Seoul with a leaders’ summit. Suggestions for how to resolve currency differences were vague in Washington, with French Finance Minister Christine Lagarde proposing better coordination and more diversification, while Canada’s Jim Flaherty suggested that new “rules of the road” be outlined. European Central Bank Executive Board member Lorenzo-Bini Smaghi suggested the G- 20 may be too big to find a compromise.


THE head of the International Monetary Fund has warned of the risks of a global currency war, as tensions over China’s undervalued currency threaten to dominate this weekend’s annual meeting of world finance ministers in Washington.

As Japan’s central bank began intervening in currency markets to put a lid on the rising yen, the IMF again appealed to China and other emerging economies to allow the markets to set their exchange rates, rather than holding them down to gain a competitive edge.

With an understatement worthy of Casablanca, Mr Strauss-Kahn told the FT that ”there is clearly the idea beginning to circulate that currencies can be used as a policy weapon.

In recent weeks, central banks in Japan, Korea and Taiwan have intervened on currency markets to stop their currencies rising. Brazil has doubled its tax on short-term capital inflows to 4 per cent. But Australia’s Reserve Bank has allowed its dollar to keep rising. Last night it was trading at US97.20, up 1.5¢ in a day.