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Repercussions of the declining dollar -

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Repercussions of the declining dollar

Broadcast: 05/10/2011

Reporter: Greg Hoy

Greg Hoy assesses the impact of the declining value of the Australian dollar.

Transcript

LEIGH SALES, PRESENTER: If you're planning an overseas trip, it's not such great news, but the fall
in the Australian dollar in recent days is bringing welcome relief for embattled sectors of the
economy, like manufacturing and tourism. Today the dollar was up slightly, but at 93.8 US cents,
it's a long way from its historic highs this year of around $1.10. The question is, will the lower
numbers last? Greg Hoy reports.

GREG HOY, REPORTER: Currency confusion: the value of the little Aussie dollar, like the value of
the molten gold it's minted from, is as confused today as the global economy. Both have soared to
historic highs before, most recently, seeing a substantial correction as global funds flood into
the safe haven of US Treasury bonds.

MICHAEL KNOX, CHIEF ECONOMIST, RBS MORGANS: Right now it's all about fear. That flood of money into
US Treasuries has been financed by a flood of money out of everything else, out of equities, out of
commodities, and, in this case, out of the Australian dollar.

JOSEPH CAPURSO, CURRENCY STRATEGIST, CBA: The Aussie dollar peaked at $1.10 against the US currency
just two months ago, so it has been a wild ride down, losing 15 cents in just two months.

GREG HOY: Much of gold's great 27 per cent gain this year has been lost, as global investors sought
to bank their profits. But it's hardly as if fear of sliding back into a global recession has in
any way abated.

BEN BERNANKE, US FEDERAL RESERVE CHAIRMAN: The economy is close, the recovery is close to
faltering. We need to make sure that the recovery continues and doesn't drop back, and that the
unemployment rate continues to fall downward.

GREG HOY: The Australian dollar had slumped yesterday - as the Reserve Bank Governor suggested
uncertainty was increasing over Europe's sovereign debt and banking problems - before rebounding a
little today on slightly better-than-expected retail figures, plus the pledge that Europe will not
abandon Greece, and its bankers, to collapse under the weight of their overwhelming debt problems.

ANGELA MERKEL, GERMAN CHANCELLOR (translation): Solidarity is cheaper for us than going alone
again. Going alone is no longer the way to the future. That's my firm belief.

MICHAEL KNOX: The European finance ministers, in spite of the incredibly slow way in which they
have proceeded, are setting about to reconstruct Greek debt in an orderly basis - really, to take
Greek debt off the market. Hopefully it will be operating by the end of this month.

GREG HOY: Meantime, this graph charts the dollar's rise and more recent fall over the past three
months. It has been a nail biting ride for so many sectors of the Australian economy, with many
cheering the recent fall with welcome relief.

IAN CHALMERS, FEDERAL CHAMBER OF AUTOMOTIVE INDUSTRIES: Firstly, it will make it easier for
Australian car manufacturers to fill their export order books. Secondly, it will make it easier for
companies that are seeking investment from offshore parents to secure more investment in Australian
technology, Australian jobs and Australian research and development.

GRAHAM TURNER, MANAGING DIRECTOR, FLIGHT CENTRE: Look, it's certainly been a factor in Australian
tourism being very weak, so we're certainly hoping that, with this lower dollar, we might see a bit
of a return to the domestic market, and hopefully not too much of a decline in the international.
But it's so volatile at the moment; I think there's a good chance it will go back over parity
anyway. We will see that, I don't know that, of course.

HEATHER RIDOUT, CEO, AUSTRALIAN INDUSTRY GROUP: The dollar is caught up in this huge whirl of
turbulence, and turmoil and volatility. Whilst industry will welcome a more competitive currency,
with world demand... global uncertainty, I think it's quite worrying.

GREG HOY: So place your bets: where to from here for the Australian dollar, and those so dependent
on its trajectory? Not surprisingly, in the current climate of confusion and fear, forecasts vary
greatly. To understand why is to understand the crosswinds now driving the dollar's value, such as
the outlook for interest rates, commodity prices and the global gloom emanating from Europe and the
United States economies.

JOSPEH CAPURSO: We think over the next month or so the Aussie dollar is likely to fall below 90
cents because of the deteriorating global economic outlook, but as things stabilise in Europe -
particularly if the Greece situation can be resolved - I think the Aussie dollar will trend higher,
probably towards parity by the end of the year.

GREG EVANS, AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY: From a business planning point of view, I
don't think business would want to start planning on the fact the Australian dollar will be below
90 cents, for example. I think it needs to assume that we'll have a relatively strong dollar in the
foreseeable future.

GREG HOY: Indeed, some think the humble Aussie dollar will again ascend to its historic high of
around $1.10 US.

MICHAEL KNOX: The Australian dollar will begin to bounce once this period of fear has finally been
concluded. In terms of those very high commodity prices and the fact that our interest rates are
still higher than other countries, we think that fair value in the Australian dollar is $1.10.

GREG HOY: In the end, of course, it's part guessing game, dividing optimists from pessimists, as to
how the gravity of global anxieties will play out.

HEATHER RIDOUT: The dollar has always been a bit of a proxy for risk, and I think one of the issues
will be how the whole world economy einvolves.

MICHAEL KNOX: Now we have a fear-driven rush into US Treasuries, driven by a fear of potential
Greek default, and the effect on the markets is now larger than after the actual Russian debt
default of 1998.

IAM CHALMERS: The base case scenario for business is they should assume we'll have a relatively
strong dollar for the time being.

GRAHAM TURNER: As everyone says, it's very volatile. It's very hard to know where we'll be in three
or four months time.