Saturday, February 4, 2012

Why did the Australian dollar collapse in 2008?

The AUD dropped 40% over a 3 month period in 2008. Why did it fall? Could this happen again?

This article explains the 2008 situation very well: Why the Australian dollar has tumbled and the U.S. dollar has not.   The short answer is panic.

"When enough people panic, the contagion of panic spreads around the world and all investments start to look dodgy. People start to really think about where they put their money because they might not get it back. So, what do people do when they aren’t sure where to turn to?
They tend to take back their money out of wherever they have it invested, bring it back home, and stick it under their mattresses. Except that you can’t really stick a billion dollars in cash under a mattress (apart from reasons of physical space, it won’t earn any interest). So people put it into the next best thing: government bonds of the world’s largest economy.
The USD is unique in that it’s the world’s “reserve currency.” Countries around the world keep their foreign exchange reserves in USD. Not sure of where else to turn to, people will just bring their money home by converting it to USD so they can stick it into bonds and also service the debt they have owing which also is denominated in USD. Being a reserve currency means that central banks from around the world can support the value of the USD as well."


  1. Because of carry trade unwinding

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