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Economy in Brief

Australia's Capital Inflows Continue to Support the Australian Dollar
by Louise Curley August 30, 2004

The Australian current account deficit increased to $12, 061 million Australian dollars in the second quarter from $10,293 million A$ in the first quarter. The deficit thus continues to run at close to 6% of GDP.

In spite of the high current account deficit, the exchange rate has begun to strengthen again after a brief decline from February to July of this year. The exchange rate had increased 63% from its low point of $.4900 US$ on September 24, 2001 to $.7979 on February 17th of this year. As of last Friday it was$.7040, up from $6980 on July 28th.

The current account has been offset by an almost equal capital inflow. Other factors--errors and omissions and
changes in reserves--have played a minor role in balancing the international accounts. As the two charts show, it is the capital account which currently appears to have the greater impact on the exchange rate. With the free flow of capital, a country can, for a time, experience a rising exchange rate in the face of a worsening current account. In the long run, however, continued current account deficits may lead to conditions that will discourage capital inflows and necessitate structural changes in the economy.

In the attached charts exchange rates, from the Haver data base, Daily, are plotted along with the quarterly current and capital and financial account. In the table below exchange rates from the Haver data base Australia are shown as of the end of the period.

  Q2 04   Q1 04   Q4 03 Q3 03 2003    2002    2001   2000
Balance of Payments (mil A$)              
Current Account -12016 -10293 -12186 -12932 -46046 -300517 -16099 -26225
Capital and Financial Account 12047 10667 12670 12879 46601 31674 16615 25419
Exchange Rate US$/A$ (EOP) 0.6889 0.7589 0.7360 0.6801 0.7500 0.5662 0.5106 0.5540
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