THE Australian dollar hit a five-year high against the greenback at 68.16 US cents in early Asia trade yesterday, in the wake of the Reserve Bank of Australia's decision to leave interest rates unchanged at 4.75% for the 13th consecutive month.
The currency later eased back from its peak to between 0.677 and 0.68 US cents.
This was the first time since March 1998 that the Aussie had surged above 68 US cents.
The Australian dollar also strengthened against the ringgit yesterday, reaching a high of RM2.59 in early Asia trade before slipping back to RM2.58. It closed Wednesday at RM2.585.
The wide differential in the interest rates of Australia and the rest of the world has been the main reason that the Aussie and assets denominated in that currency are more attractive than those in other countries.
Furthermore, the steady economic growth in the continent, which has not been severely affected by external shocks, has exerted no pressure on the government to reduce interest rates to spur the economy.
Australia's economic growth is expected to fall marginally to below 3% this year due to the long drought that has affected crop harvests and lower tourist arrivals caused by the Severe Acute Respiratory Syndrome (SARS) outbreak in the region.
This growth rate is, nevertheless, still better than those of many Organisation for Economic Cooperation and Development (OECD) ) countries.
The differential between the Australia and US interest rates is now at its widest since April 1992 after the US Federal Reserve slashed interest rates by 25 basis points to 1% last week.
The European Central Bank had also shaved interest rates by 50 basis points to 2% early last month.
The sharp appreciation of the Aussie has also attracted international fund managers to Australian bonds, which have been the world's second best performers among the top AAA-rated nations in the past six months.
“Australia is now seen as a very high-yielding market for foreign investors to place their money in.
“While Australian interest rates remain well above those of the rest of the world, the money is going to keep flooding in,'' the chief strategist at Sydney's TD Securities, Stephen Koukoulas, told Bloomberg TV yesterday.
The strengthening Aussie is, however, not really a blessing, particularly for the country's exporters.
About 70% of Australia's exports are priced in US dollars. A strong local currency means lower earnings from overseas for exporters like Rio Tinto and WMC Resources.
Indeed, the Aussie's relentless climb has prompted exporters to hedge by buying the local currency at current levels.
Many currency strategists expect the Australian dollar to head higher against other major currencies because Australian exporters are buying the unit at prevailing high levels to seek protection against further appreciation.