Currency Fluctuation Worries Business People

America's ballooned account deficit has seen the weakening of the US dollar, which in turn has seen the strengthening of the Australian dollar, and which in turn has had Pacific Islands countries with currencies measured by a fixed basket watching keenly the performance of their own dollar against the US dollar. This double edged sword has become more of a curse than a blessing because it has meant that those buying from Australia (major trading partner for most Pacific Islands countries) and New Zealand are having to pay more, while exporters who pay in US dollars are getting less for their goods.

A few months ago, exporters in Fiji were complaining about it. They were concerned about their products reaching their destinations at a higher price making trading with Fiji less attractive. The Textile, Clothing and Footwear (TFC) industry was said to be feeling most of the brunt. One operator even predicted the fall of the industry, if the trend continued because it would further marginalise Fiji operators.

"The dilemma is experienced by those who export to Australia. They are finding it expensive to import their raw materials which they buy from Australia. It is more attractive now to buy directly from the United States. But if they buy from the United States, they instantly do not qualify for concessions under the Rules of Origin which requires a certain percentage (50 percent) of local content to originate from Forum Islands Countries," said Fiji's TFC council secretary Ray Dunstan.

FICs can source the local content of their product either locally or from other PICs which include Australia and New Zealand.
Furthermore, Dunstan said the cheaper US dollar has now made it cheaper too for Australia to buy from Asian countries, which are already Fiji's major competitors.

Apparently, much is pinned on the nature of the currency strength determination in Pacific islands countries that issue their own.
They are Fiji, Vanuatu, Papua New Guinea, Tonga, Samoa and the Solomon Islands.

To determine the strength of their money, their central banks use a basket of currencies mix in accord with the level of overall imports, exports, services and capital flows that take place between them and their trading partners.

These central banks, explained former Westpac Fiji treasurer Daryl Jarrett, set a daily exchange rate against the US dollar in accord with the movements that have occurred overnight between their trading partners and the US dollar. Therefore, movements of the Australian and New Zealand dollars against the US dollar largely determine the weighting and resultant impact of Pacific nations currencies against the US dollar.

On the global front, the US dollar has been sliding due to a number of factors, while other currencies have been strengthening. While this theoretically should cause the currency appreciation of USA's major trading partners (China, Japan), Jarrett said this has not been the case due to conservative reactions in those countries.

"This situation has left other currencies to carry the responsibility of appreciation against the US dollar to bring the relative value of the US dollar down against others. The Euro, Australian, Canadian, New Zealand currencies, have been carrying this responsibility. Until the United States' major trading partners allow their currencies to appreciate against the US dollar, the Australian, Euro and New Zealand dollar will continue to rise against the US dollar," explained Jarrett.

For Pacific islands nations, this will mean their currency decline against the Australian and New Zealand dollars will continue as well as their appreciation against the US dollar.

Industries like aviation and tourism are likely to benefit while export proceeds received in US dollar are inevitable casualties.

Jarrett forecasted that the situation will continue in the near and medium term.

The impact has also been felt in other PICs. According to John Ridgway, president of the Australia/Pacific Islands Business Council, the decline in the US dollar has been exacerbated by three other factors: the non-floating (basket) currency situation, efforts of some countries to comply with World Trade Organisation (WTO)) requirements for lower tariffs and the increasing competition coming from Asia, particularly China.

Most importantly, the situation has contextualised these islands nations to being more expensive to trade with than countries in Asia because of the former's continuously strengthening currencies against the US dollar.

In relation to the WTO position, Ridgway explained that many of the countries are either under increasing pressure or have taken it upon themselves to join or try to join WTO.

"The requirements for reduction or eradication of tariffs mean that Pacific markets will become much more attractive to export to. The Australia dollar exporters will find this position very difficult if the Australian dollar remains high.

"Factors such as greater economies of scale, the substitutability of products, the rate of innovation in Asia means that exporters from Asia will be much better placed than exporters from Australia if tariffs are reduced and if its currency remains as strong as it has," said Ridgway.

Similarly, he added, exporters from Australia to Micronesia are finding it very difficult at the moment because the Micronesian economies can source products from the United States for much less than what they could.

On the other hand, companies in Australia will also be able to source cheaper products from Asia than from the Pacific, so in the end, "there does not seem to be many trade advantages for the Pacific with such strong Australian dollar".

Like Jarrett, Ridgway believes the situation will be around for a while. "The tariff situation will mean this issue will be with us for some time to come. It is hard to know when the Australian dollar will eventually settle. But there is no doubt there's going to be some pain felt by Australian exporters to the Pacific and Pacific based exporters to Asia in the short to medium term," he said.