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Dollar the most overvalued currency

The Australian dollar ... judged to be the world's most overvalued currency at the moment.

The Australian dollar ... judged to be the world's most overvalued currency at the moment. Photo: HSBC

The Australian dollar is the most overvalued currency in the world, but there is little will to intervene, according to a global valuation.

Using data from the OECD's measure of purchasing power parity, The Economist's Big Mac Index and the Current Real Effective Exchange Rate (REER) as compared to its five-year average, HSBC found that Australia had the world's most overvalued currency, while having policymakers who were among the least active in the so-called ''currency war''.

We’ll be out in the war zone with a peashooter. 

The Australian dollar is almost 12 per cent overvalued under REER, and overvalued by 12.2 per cent, according to The Economist's index.

Using the Organisation for Economic Co-operation and Development's measure of purchasing power parity, the Australian dollar is overvalued by 60 per cent.

'Currency war'

HSBC said in its report that currencies such as the Australian dollar, which are not actively participating in the so-called currency war, ''will likely see further upside should the conflict worsen''.

''The currency war phenomenon means FX (foreign exchange) will lead other asset classes, rather than following them. FX is back in the driving seat.''

The bank's analysts added that the lack of active intervention in the foreign exchange market by Australia and New Zealand meant interest rates were less likely to rise in the next few years.

''Currencies are a relative game, and for those countries targeting a weaker currency, there is always going to be a flip-side stronger currency,'' they wrote.

''Australia and New Zealand continue to highlight the overvalued level of their currencies, a reality which has contributed to lower interest rates in the past and will likely hinder the extent of rate hikes in the years ahead.''

Stronger for longer

ANZ currency strategist Andrew Salter said while the Australian dollar looked heavily overvalued relative to PPP, it was only slightly overvalued relative to the level of commodity prices.

‘‘If you take into account the income gain that has accrued to the Australian economy over the last few years as a result of the very high commodity prices, it’s a little bit more difficult to make the case that the Australian dollar is substantially overvalued,’’ Mr Salter said.

At the same time, the unconventional monetary policy measures some economies have taken to weaken their currencies, such as through quantitative easing - which in essence involves governments printing more money - have caused the Australian dollar to strengthen, and led to local interest rates to be slightly lower than they otherwise would have been, he said.

Mr Salter said ANZ expected the Australian dollar to remain around the $US1.05 mark for the rest of year.

While the bank forecasts interest rates to ease by 100 basis points to 2 per cent this year, reducing upward pressure on the exchange rate, the dollar would continue to remain popular among global investors given the high yields in Australia relative to the rest of the world.

‘‘That’s not just yields in equity and bond investments. It’s also on real estate as well. We’ve got some very high yields in commercial property in Australia relative to comparable investments overseas,’’ Mr Salter said.

Intervention a 'huge risk'

On Wednesday, New Zealand's finance minister, Bill English, said his country's currency was only a ''peashooter'' in the world's FX markets, and that he would not risk using its limited funds to intervene to lower the strong dollar.

''We have been pretty clear we are not willing to take the kind of huge risks involved in large scale speculation on the exchange rate with taxpayers' dollar,'' Mr English said after a parliamentary committee hearing, Reuters reported.

The New Zealand dollar has risen by about 11 per cent since May last year, Reuters added. Like Australia, the country's export sector has struggled to cope with the strength of its currency.

''We just don't want to take that kind of risks. We are a small country,'' Mr English added. ''We'll be out in the war zone with a peashooter.''

Reserve Bank of Australia governor Glenn Stevens briefly mentioned the Australian dollar in his statement following the central bank's decision to hold interest rates at 3 per cent for this month, writing that ''the exchange rate remains higher than might have been expected''.

HSBC's analysts said the ''currency war'', which has been carried by some countries through quantitative easing and the introduction of legislation, would intensify if the recent recovery of the global economy falters and countries jostle for the limited available growth opportunities.

The Australian dollar was this afternoon buying $US1.0356, 96.1 yen and 77.55 euro cents.

85 comments

  • It's funny to notice all the places with low PPs/overvalued currencies are the places where you'd want to live. The majority of currencies that are undervalued have societies that are less appealing to someone seeking a free life.

    Commenter
    G
    Date and time
    February 15, 2013, 2:43PM
    • It's funny how the mining industry has pushed the dollar up so high while 10's of thousands of locals lose jobs as manufacturing collapses. Times are going to get really difficult in Australia and the EU is continuing its dive again on markets as more people over these lose jobs. Every country in the world is not debasing trying to drop the value of their currency to have the cheapest exports, all expect China, they have been doing it since the dawn of time. Expect more job losses in Australia and expect the property industry and value to crash as government workers get laid off because of less tax money from home sales creating a feedback loop. I am beating either QLD or VIC will be the start of the housing crash. VIC is slightly in front.

      Commenter
      Mel
      Location
      Mel
      Date and time
      February 15, 2013, 2:55PM
    • Speak for yourself - the climate and cost of living in Scandanavia puts a big red cross through it for me.
      On the other hand, I wouldn't mind living in the Czech Republic...

      Commenter
      Mouse
      Date and time
      February 15, 2013, 2:56PM
    • I would live in the Czech Republic, better there than Australia in many ways... I don't know how good the job market there is though.

      Commenter
      Bill
      Location
      Sydney
      Date and time
      February 15, 2013, 3:00PM
    • G. Give it ten years and you will see method in their madness. How free you will be in Australia might have something to do with not being employed in manufacturing/retail/travel or any export related ndustry.

      Commenter
      melgibson
      Date and time
      February 15, 2013, 3:05PM
    • G, that is a ridiculous comment.

      But a PPP index based on big mac prices is a ludicrous thing to start with.

      Commenter
      Robert
      Location
      Canberra
      Date and time
      February 15, 2013, 3:14PM
    • What I find jaw-dropping is the number of fellow Australians who talk their economy down saying how tough everyone is finding when, by virtue of these data, it is one of the few countries where everyone would like to live (think boat people!). Perhaps Mr Abbott's secret to stopping the boats is to raise unemployment, reduce the standard of living and cut public services to such a degree that no one will any longer have that incentive. Perhaps that will be when Gina's $2 a day wage structure is brought in. That's the time to move to Czechoslovakia I reckon.

      Commenter
      Clive
      Location
      Manly West
      Date and time
      February 15, 2013, 3:37PM
    • Mel I don't think all of the dollar's high value is due to the mining boom. It's also to do with Australia's triple A rating, ordered and well run banking, relatively high interest rates and political stability attracting foreign capital which is buying Australian dollars and investing in Australia. When coal and iron ore prices dropped last year the value of the dollar didn't showing that mining is far from the only reason for the high dollar.

      Commenter
      Ian
      Location
      Fremantle
      Date and time
      February 15, 2013, 3:40PM
    • How true and about time someone realised what I call the false economy. It is logical, jobs going, population increasing too fast, dole recipients increased, businesses closing, most big industries profits go overseas, services all slashed to non existence, and we have only really saw mining raise money, only to find the new mining tax raised bugger all and sales fell. For years our earning dollars have fell and our dollars flowing to overseas grew, and CPI is grossly inaccurate and did not count doubling of rents and average real rises in basic needs costs, they say $13 per week CPI but we all know its been far beyond that, just electricity rises alone were higher than CPI amount told to us. But will facing the reality of overvalued dollar destroy us, yes highly likely, as there must be a reason to falsify it in a non productive country outsourcing to cheap labor countries. START WORRYING.

      Commenter
      Brian
      Location
      glenroy
      Date and time
      February 15, 2013, 3:52PM
    • You're wrong my friend. Overvalued currencies return very unpleasant countries to live in. Things become expensive, people become rude, stress is high, everything shoots to unrealistic levels.

      You think people are happy with this, but that's not true. They don't notice it because it happens gradually so they adjust and learn to live with it, whereas if it happened all in one go it would be a shock nobody would want. But just like a disease that slowly affects your body and then later might even kill you, this is what's happening now.

      Doesn't matter if you're rich or poor, I'd say that most people want for things to be at realistic levels and in many of the countries that have overvalued currencies, everything else is also off the charts and sooner or later - just like with all extremes, something bad will happen and everybody is going to be adversely affected.

      Commenter
      John
      Location
      Sydney
      Date and time
      February 15, 2013, 3:56PM

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