Sunday, November 11, 2007

Predictions for Australian Dollar 2008

The Australian economy has many similarities with the UK economy. It has benefited from a continuous period of economic growth since 1991. Economic growth is currently averaging 3.5%. Inflation which is currently 1.9% is forecast to rise to 2.9% in 2008.

The Australian economy is benefitting from:
  • Renewed economic growth in Japan, its main trading partner
  • Increased demand for its raw materials, from countries such as China and South east Asia
Challenges for the Australian economy include:
  • Growing current account deficit over 5% of GDP
  • Inflationary prospects increasing due to labour shortages

Australian Dollar

Surprisingly the Australian dollar is the fifth largest traded currency in the world (after the dollar, Euro, Yen, and Pound Sterling.) The Australian economy only accounts for 2% of total world output.

The attraction of the Australian dollar is due to Australia's close connection with the rest of Asia and relatively stable and flexible economy. It's importance is also due to its close connection with Commodity prices.

The future of the Australian dollar thus depends on:
  • Strength of commodity prices. - With commodity prices rising around the world, it is likely that the dollar will continue to offer an attractive option for investment
  • Interest Rates. With rising inflation and a current account deficit it may be necessary for a rise in Australian interest rates
  • Current Account Deficit. The large deficit could put downward pressure on the AUS dollar, the dollar has been devaluing, with only a slightly bigger current account deficit.

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