Sam's big slide

A SEALED limited edition box set of the Beatles' remastered mono recordings was going for $699.99 on eBay last night.

The re-mastered songs were "a thing to behold", according to the seller, with Lady Madonna "rolling like a freight train" and I'm Down "hitting the guts".

The seller was based in a town called Lake Forest in the US, which means any Australians buyer would have done a quick calculation to see how many Australian dollars they would need to pay for the box set and the $US44.55 postage a total of $US744.54.

Yesterday, $US744.54 was worth $A810.52. A year ago it would have been $1110.43.

But the rise of the Australian dollar is not just a story about the good deals suddenly available on global online auction websites.

With Australia's strong economic position in relation to other developed economies and the benchmark interest rates at 3.25 per cent, Australia is an attractive currency for foreign investors right now.

From a consumer's point of view, a weak currency is bad because foreign travel is expensive and foreign-made goods cost more. But from a government's point of view a weak currency can be a very good thing, particularly if you have a lot of debt and want to increase your exports.

The US dollar has been weakening since 2002, falling about 10 per cent every year against the currencies of its 20 major trading partners, according to a trade-weighted index compiled by the Federal Reserve.

Its fall was interrupted in March last year when investors started getting jittery about high-risk investments and began transferring their assets into cash. When the liquidity crisis hit in October, demand for the US dollar jumped and the dollar shot up to 95 points on the trade-weighted index in November, the strongest it had been since 2007.

Businesses were buying US dollars straight out of the currency cash markets because they could not get credit through normal channels, Macquarie Group economist Mark Tierney told BusinessDay. This pushed the price of the US dollar even higher.

But as the debt crisis has faded and the cost of borrowing returned to normal levels, that cash has been sold back to the market.

Now, the US dollar has returned to that longer-term downward trend, and since April this year has fallen about 15 per cent on the Federal Reserve's index. Against the Australian dollar, it has dropped 45 per cent since 2002.

In July last year, the Aussie reached US97.98?, then fell US30? after the financial crisis hit. It has since recovered, and as BusinessDay went to press last night it was buying US92.25?.

Demand for the US dollar is expected to stay low for as long as the Federal Reserve keeps its benchmark interest rate at an emergency low of 0.25 per cent. Low interest rates give a low return on cash deposits, so investors are converting their deposits into higher yielding currencies, like the Aussie.

As well, there is an excess of greenbacks on the market because of something quietly happening inside central banks around the world.

The amount of foreign currency that central banks hold is increasing, but the proportion of US dollars is decreasing.

About $US413 billion worth of foreign currency is now held by central banks, according to research by Bloomberg, but only 37 per cent of it is US-denominated currency. In 1999, US dollars made up 63 per cent of foreign currency reserves.

The weaker dollar actually helps the US Government, so it is doing nothing to stop the decline.

"A weaker dollar will probably help to fix some structural problems the US economy has," says the head of the economics department and professor of economics at Melbourne University, Nilss Olekalns.

"It should help the current account of the balance of payments, and it should help boost the level of demand in the US by making US exports a bit more competitive."

A weaker US dollar also helps the rest of the global economy because it stimulates growth in the world's biggest economy.

It could even help keep interest rates in Australia low, Professor Olekalns says, because the high Australian dollar increases demand for foreign goods.

Lower demand for domestic goods stops the economy from overheating, and reduces the risk of inflation. If the Reserve Bank is not worried about inflation, it will not raise interest rates, he says.

But it damages the bottom line for Australian companies that earn their money overseas.

Goldman Sachs JBWere's research team on Thursday released a list of local resource companies that were sensitive to the rising Australian dollar.

Centennial Coal, Felix Resources, BlueScope Steel, Newcrest Mining and Fortescue are all likely to see at least a

20 per cent decline in their earnings per share for every US5? increase in the Australian dollar, the research note says.

Tierney says that countries with external debt denominated in foreign currencies often have trouble paying off their loans because the amount increases as their currency falls in value.

"The US issues most of its debt in its own currency, so it has got what some economists call 'exorbitant privilege'," he says.

"So, when the US dollar goes down, there is no valuation effect on their foreign liabilities because its is exactly the same in US dollars, but their foreign assets rise because they are held in foreign currency."

For example, if the European Central Bank lent the US a trillion dollars in January, it would have been worth ?712 billion. But because the greenback has devalued, that $US1 trillion is now worth

?671 billion. The US still has to pay back $US1 trillion, but when the Europeans convert it back into their currency, they lose ?41 billion.

The United States' biggest creditor is not cursed by this problem because the Chinese Government has unofficially pegged the yuan at 6.83 to the US dollar. Their yuan falls as the greenback does, which also increases China's export competitiveness and national income.

"This is one of the reasons [the Chinese] have been very quiet about this," Tierney says. "They are not worried because their competitiveness is improving as well."

However, China is under pressure to let its currency appreciate, which would lift its export prices and so rebalance global reserves.

China's foreign exchange reserves, which are mostly in US dollars, are expected to reach $US3 trillion in June next year, Bloomberg reported on Thursday.

A little inflation would also help the US Government and households pay off their debt, which would help reverse global reserve imbalances.

However, in a recent research note to clients Morgan Stanley's global strategist, Gerard Minack, notes some concerns about the decline of the US dollar.

Firstly, that it indicates the US is retreating as the global reserve currency, secondly that the US dollar is becoming a "funding currency", and thirdly, that there is genuine concern about the quality of US dollars.

A funding currency has permanently low interest

rates, such as the yen, so investors borrow money in

that currency, then immediately sell it to buy assets in another currency. This drives the value down even further.

"It would destabilise markets if the dollar's decline morphed into a rapid escape from dollar assets due to concerns about US finances," Minack says in a note published on October 14.

There are a few triggers that would encourage the dollar to start appreciating, he says, particularly a rise in US interest rates or an improvement the country's fiscal position.

"We lean to the view that the more likely trigger for a dollar reversal is a material setback in risk markets, in particular the risk of Wall Street stumbling in the first half of 2010."

Inflation is another big concern, but so far there are no signs that it is getting out of control in the US, Minack says. The outlook for the US economy is still dim, with car sales falling and consumer confidence and spending low.

And although US-denominated commodities, particularly energy and minerals, are expected to rise in price as the value of the US dollar decreases, this is unlikely to lead to global inflation because the world economy is still badly damaged by last year's financial crisis, Minack says.

There is also a lot of spare capacity for global growth, says the chief commodity analyst at the Australian Bureau of Agricultural and Resource Economics, Jammie Penm, and inflation will only become a big concern if there was no spare capacity but prices keep increasing.

While the rising value of the Australian dollar would neutralise the effect of rising commodity prices for retail consumers, commodity exporters' profits could fall.

Agricultural commodities are less exposed to the upward pressure from a declining US dollar, Dr Penm says, because there are many other factors that influence agricultural prices, such as seasonal conditions and global production levels.

However, a stronger

Australian dollar would make it harder for agricultural producers to sell their products overseas.

The longer-term impact of the declining US dollar could be its decline as the global reserve currency, says the professor of international economics at the Australian National University's Crawford School of Economics and Government, Prasanna Gai.

However, he says this could not happen until households, businesses and governments find a trustworthy replacement.

"New international currency units do not just crop up," he says. "I think even 2018 would be very optimistic for a change in currency."

The 2018 date refers to recent reports that China, Russia, Japan, France and the major oil producing economies are developing a new "basket" currency for oil prices. Their aim is to exclude the US dollar to reduce its power.

"What you will probably see is competing currencies over the next 10 to 20 years," Professor Gai says.