When a Strong Currency Is Not a Good Idea – Part Two

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Continued from Part One.

As the FT report says, just this year the Australian dollar is up nearly 6 percent against the US dollar since the start of January, and BHP Billiton, not usually thought of as a high-cost producer, announced last week that it would temporarily cut production at its Mount Keith nickel mine in Western Australia, blaming “depressed nickel price and a strong Australian dollar.”

When BHP Billiton expanded Mount Keith in the early part of the last decade, it was costed on nickel that was around $3.00 per pound at that time, with an anticipated extraction cost of about $2.00 per pound. Today, nickel is on average over $9.00 per pound, yet Mount Keith is no longer viable.

Nor is the problem reserved for nickel. Thomson Reuters GFMS, the precious metals consultancy, argues the appreciation of producing countries’ currencies against the US dollar is the “main driver” of estimated cash cost inflation of 14 percent in the global gold industry in the first 9 months of 2011. In Australia and South Africa, costs rose 21 percent and 23 percent, respectively, according to the FT.

Soaring currencies are not just a problem for resource-rich countries; any major exporter faces the same problem and this partly explains Germany’s robust manufacturing sector operating from a weak Euro base.

Japan has faced the same problem as resource-rich economies, as Japanese manufacturers have been priced out of overseas markets, forcing the Ministry of Finance to sell yen five times in the final quarter of 2011 in an attempt to drive down the yen. Records show the ministry sold a record $105 billion in a single day on Oct. 31, followed by more in the following days.

Unfortunately, they did not simply sell yen and buy dollars — many of the trades involved buying other Asian currencies, including the Australian dollar, adding to the strength of that currency.

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