Russian central bank buys up Aussie dollars

By finance reporter David Taylor

Updated 5 hours 16 minutes ago

The Australian dollar is now ranked the fifth most popular currency in the world.


    * Audio: Russia backs Australian dollar (The World Today)

The Russian central bank says it wants to buy just under $5 billion in Australian currency.

The Australian dollar is now ranked the fifth most popular currency in the world, and the Russian move is another sign that international investors are losing faith in the US economy.

AMP Capital Investors chief economist Shane Oliver says a $5 billion investment is substantial.

"In the great scheme of things, measured over the course of the year, it is trivial in terms of the transactions that occur in the Australian dollar," he said.

"But in terms of one entity, in this case the Russian Central Bank, buying currency and then holding onto it, it is a fairly significant amount."

This latest move by the Russian Central Bank is a vote of confidence not just for the Australian dollar, but for the prospects for the Australian economy, according to CommSec senior economist Savanth Sebastian.

"A lot more of the central banks around the globe will start believing in the Australian growth story," he said.

"Our links with China will certainly add to the gain for the Australian dollar, and the Reserve Bank of Australia have continued to highlight that they are very hawkish when it comes to interest rates, so that means further rate hikes on the agenda and more money inflows into the Australian economy."

However, the ascent of the Australian dollar has largely been at the expense of the US dollar.

America has been flooding global financial markets with US dollars, thereby reducing its value.

It is part of a last ditch attempt to stimulate markets by providing easy money.

The chief currency strategist at Westpac Robert Rennie blames the US Federal Reserve for pumping so many extra US dollars into the global financial system.

"The ultimate source of this liquidity really is the Fed. As the Fed increases the size of its balance sheet and pumps money into the US economy and the global financial system, one of the areas that it ends up in is in the demand for the Australian dollar," he explained.

Robert Rennie says that has put the Australian dollar front and centre on the international stage.

"I think it is a claim to fame. I think it has been a claim to fame for some time, and I think it is a claim to fame that we will continue to have. You know, the Australian dollar is seen globally as being very attractive," he said.

The only currencies still ahead of the Australian dollar in terms of popularity in trade against the US currency are the euro, Japanese yen, British pound and the Swiss franc.

The US dollar has lost popularity as important questions keep being raised about the credibility of the US recovery.

"I think what we're seeing here is a lack of confidence in the US dollar," said Shane Oliver.

"Foreign central banks, including the Russian Central Bank, are effectively saying 'yes we are prepared to hold some US dollars but given the risks surrounding America particularly with its very high foreign debt problem, we want to have a lower amount than we've had in the past'."

That means the Australian dollar's strength is set to continue according to CommSec's Savanth Sebastian.

He sees the Aussie dollar climbing another 5 to 10 US cents.

"We are actually expecting the Australian dollar to get to around $1.14, $1.15 by the end of this September quarter," he forecast.

However, the lower fuel prices that Australians can often expect from a stronger currency may still be some way off

"We should start to see further gains in terms of savings for motorists in the next couple of weeks. I guess if those savings don't come through then the question needs to be asked from oil companies," Mr Sebastian said.

One thing is for sure, that overseas trip to the US is still looking very attractive.