Business

Australian dollar hits 29-year high on commodity demand

  • 30 March 2011
  • From the section Business

The Australian dollar has risen to a 29-year high against the US dollar as demand for the country's commodities continues to grow.

It rose as high as $1.0318 in trading on Wednesday, the highest since the currency was freely floated in 1983.

There has been a steady demand for Australian commodities from growing economies like China and India.

High interest rates and relatively low inflation have also seen investors pump money into the country.

Australia's economy grew by 2.7% in 2010 and analysts say it could grow at an even faster pace this year.

This has seen the demand for its currency rise as investors look to enter the Australian market.

Positive sentiment

The recent natural disasters in Australia, New Zealand and Japan had seen a sharp fall in market sentiment as investors worried about their impact on regional and global growth.

However, as the full impact of these disasters becomes clear, investors are optimistic that countries and companies will be able to cope with the rebuilding costs.

This has seen stock markets bounce back and commodity prices rise again.

Analysts say a positive global sentiment has a big impact on Australian markets.

"Given its dependence on exports, the Australian economy gets affected the most by global sentiment," said Sean Callow of Westpac Bank in Sydney.

"The turnaround is especially being felt in the commodity markets with prices rising once again," he added.

Mr Callow said that is boosting investor confidence in the Australian economy and could push the Australian currency even higher.

"The fact that it can rebound despite the recent disasters will only encourage investors to anticipate further gains," he said.

Insurance payments

Image caption Demand for Australian dollars has been rising as investors look to bring money into the country

Early this year the Australian states of Queensland and Victoria were affected by severe flooding which was described as 'biblical' by one of the senior government officials.

Insurance companies are facing claims worth hundreds of millions of dollars from customers due to the damage caused.

Analysts say that it is likely many Australian insurance companies may have reinsured their risk with global insurers.

They say these foreign insurance companies are having to buy Australian dollars in order to make payments to customers, which is driving up demand for the currency.

"It is widely assumed in the market that the bulk of the payouts will ultimately be sourced from European reinsurance companies, as appears to have been the case for the September 2010 New Zealand earthquake," Mr Callow said.

More on this story