Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 41

Happy 30th, $A float best policy change in post-war era

Australians aged 50 or more would recall the surprise 30 years ago – late on the afternoon of 9 December 1983 – when our mollycoddled dollar was floated.

The float is, in my view, the most significant change affecting the Australian economy - and investor choice - of the past 70 years. And that claim stands tall, even though our exchange rate to the US dollar (94 US cents at time of writing) is close to where it finished (92 US cents) on the first day of the float three decades ago.

Prior to the float, four officials (from the Reserve Bank, Treasury Finance and Prime Minister’s Department) set the daily value of our exchange rate in trade-weighted terms.   Their all-too-predictable moves made a motza for speculators at the expense of taxpayers - and set up capital flows that largely stripped monetary policy of its effectiveness.

In the run up to December 1983, many people pointed to the need for the Australian dollar to more responsive to market forces. But no-one in the market or the media expected Treasurer Paul Keating to go all the way and allow a clean float of the exchange rate. He also announced the end of the tight web of exchange controls, including on Australians wanting to invest overseas, that were introduced as emergency measures in World War II.

The surprise added to the impact of the float. As Paul Kelly wrote in the early 1990s, “The float transformed the economics and politics of Australia. It harnessed the Australian economy to the international market place – its rigours and ruthlessness. It signaled the demise of the old Australia – regulated, protected, introspective.”

In the first 20 years of the float, the Australian dollar largely moved up and down with commodity prices. These days, other influences are also at work, such as interest rate differentials, our sovereign ranking and the strength or weakness of the US dollar against the major currencies.

The floating dollar has significantly reduced the impact on Australia’s economic pulse of swings in the global economy, just like good shock-absorbers on a car smooth a drive along a bumpy road. For example, the sharp fall in our exchange rate during the Asian crises of the late nineties and in the GFC softened the impacts on our economy of those massive disruptions in the economies of our trading partners. And the currency appreciations when world growth accelerated in 2004 and particularly during the recent resource booms helped avoid the over-heating of the economy.

The float has made Australian monetary policy more effective. No longer does the Reserve Bank have to purchase or sell Australian dollars to keep the Australian dollar at the target level (or range) – transactions that would generally lessen the impact of its monetary action. The long run of low inflation, including during the recent mining booms, and the enviable record of also going more than 20 years without serious recession would not have been possible without the float.

Of course, it’s not always been easy sailing. When the Aussie dollar fell to 48 US cents in 2001 and again when it peaked a little above 110 US cents in 2012, the exchange rate moved further than the fundamental influences on the currency would seem to have required. Those extreme levels of the currency caused serious pain in some sectors of the economy. Even now, the Australian dollar is a good deal higher than a lot of people would like it to be – and is defying efforts by the Governor of the Reserve Bank to talk it down.

But what would have happened had we maintained a managed exchange rate? The answer, in part, is that events such as the strong commodity prices and mining boom of recent years would have likely have resulted in a burst of inflation that would also have hurt Australian competitiveness – and created all sorts of problems for most Australians, especially investors.

DS graph

DS graph

 

 

Don Stammer is an adviser to the Third Link Growth Fund, Altius Asset Management, Centric Wealth and Philo Capital. The views are his alone.


 

Leave a Comment:

     

RELATED ARTICLES

Keating versus Hume: where willy-nilly meets obscene

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.