ANALYSIS: Australians fret about their almighty dollar

By Sid Astbury May 2, 2011, 2:11 GMT

Sydney - Economists tell you that the 380 workers sacked when Germany's Robert Bosch GmbH shifted car parts manufacturing from Melbourne to South-East Asia could jump on a plane for Perth and land better-paying jobs driving big trucks in the labour-starved ore pits.

It would show in microcosm that Australia was behaving according to international trade theory and giving up manufacturing to make the very most of the comparative advantages it has in mining.

Specialization has worked a treat, according to Chris Richardson, an economist with business consultancy Deloitte Access.

'The world is throwing more money at us than we've seen in more than a century and unemployment is already less than five per cent and headed lower,' he said.

Sounds too good to be true? It is.

The mining boom has helped inflate the value of the Australian dollar. It has gained 11 per cent in value against the US dollar in the last six weeks.

A higher dollar makes imports cheaper but it makes life hell for manufacturers, for those in tourism and for those hawking services like education in foreign markets.

'Businesses are seeing competitiveness stripped from beneath them,' said industry lobby group leader Heather Ridout.

Calling on the Reserve Bank of Australia to intervene in the money markets to help save manufacturing and trade-exposed service industry jobs, she said that when currency appreciation 'starts to drive structural change in the economy, people should be asked to justify whether it is a good thing or not.'

The central bank does trade currencies, but currently it is sitting on its hands. Ridout and others would like to see the bank follow its counterparts in the United States, China and Japan and engineer a devaluation.

The chief job of the central bank is to hold down inflation and a a strong currency helps with that.

'Increasing interest rates is hard work,' HSBC economist Paul Bloxham said. 'If the exchange rate does some of the work for you in terms of slowing down some parts of the economy, I think that's regarded as a good thing.'

One reason the Aussie dollar is soaring is that the markets are betting that the bank, which has kept the cash rate steady at 4.75 per cent for six months, will be forced to raise interest rates in the coming months to choke off inflation.

A rate rise will make holding the dollar even more attractive - and strip even more competitiveness from the manufacturers that Ridout wants protected.

Griffiths University economics professor Tony Makin estimated the rising dollar had the equivalent effect of chopping 40 per cent from the protection that some Australian manufacturers receive. But he does not see the central bank able to help the withering manufacturing sector.

'All in all, the staggering commodity price hikes worldwide cannot be ignored as a signal of higher inflation to come, with the Reserve Bank will be obliged to try to counter by raising domestic interest rates,' he said.

Manufacturing employs 10 times as many people as mining. And most new mining jobs will be in city-based professional services like accountancy rather in positions that could be filled by those thrown off Bosch's production lines in Melbourne.

So far, the central bankers are resisting pressure on them to bash the local unit down. What Ridout fears may come to pass: a high Aussie dollar and even higher interest rates.

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