The Aussie dollar has surged past parity with the US dollar, reaching as high as US1.0062 after the US Federal Reserve announced that it would buy $600 billion in treasury bonds in an additional round of ‘quantitative easing’ to prevent deflation.
The Aussie dollar improved its position against the Greenback on Tuesday when the Reserve Bank of Australia increased official interest rates 25 basis points and the Commonwealth Bank increasing home loan rates 0.45 percent, making currency in Australia more valuable compared to the USA, with the Aussie dollar flirting with parity since the RBA’s announcement.
The US Federal Reserve announced overnight what had been hinted at by Federal Reserve Chairman Ben Bernacke that the Fed would spend $600 billion to buy US government bonds in order to stimulate the economy and boost employment and prevent deflation, which if it occurs could spiral out of control and result in the US economy stalling as happened in Japan in the 1980’s. With the US Federal Reserve buying government bonds, it is injecting $600 billion dollars into the US economy through the Government that didn’t exist before, economists call the practice ‘quantitative easing’, but it amounts to the equivalent of printing more bank notes and throwing them out of airships above the cities to stimulate economic activity.
With the increase in the quantity of the US Dollar in circulation as a result of the Fed’s quantitative easing process, it is creating inflation, which causes the purchasing power of the US dollar to decrease (each US dollar buys slightly less than it used to, because everyone knows there are more of them in circulation now) which in turn leads to the US dollar depreciating against all other currencies, including the Australian dollar.
The Aussie dollar is trading at its highest level against the Greenback since being floated 28 years ago. The New Zealand dollar (the ‘kiwi’), trading as high as 78.07 cents, it’s highest level since 2008.
