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Monday
Jul092012

Recent announcements by central banks to increase their Aussie dollar holdings are an expression of trust in the health of the Australian economy. But history suggests the boom will not endure, writes Timo Henckel of the Australian National University.

Central banks everywhere – from Russia to the Czech Republic – are piling into Australian-dollar-denominated assets. This has limited the fall of the Australian dollar to around 3% from its peak even though commodity prices, which are strongly correlated with the Aussie dollar, have fallen globally by 10%. Even the German Bundesbank, the stodgiest of central banks, announced its intention to increase its reserve allocation of Aussie dollar assets. Is the Australian dollar, the fifth-most traded and among the most volatile of currencies, about to rival the US dollar, the yen, and the Swiss franc as one of the world’s major reserve currencies? And does this increased demand for assets created down under change the way the Reserve Bank and the Treasury conduct policy?

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