Australian dollar bites at US dollar’s reserve currency status

April 22, 2011 6:02 PM EDT

In recent weeks, global central banks have accelerated their pace of diversification out of the US dollar.

One of the main beneficiaries has been the Australian dollar, which has surged in the face of bearish developments.

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Since March 16, it has soared almost 10 percent against the US dollar despite Japan’s nuclear crisis.

Japan’s situation is negative for the Australian dollar because Japan is the second biggest importer of Australian goods. Moreover, Japan’s troubles curb overall global risk sentiment.

The Australian dollar also rallied despite the falling prices of coal, Australia’s main export.

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Some of the Australian dollar’s strength came from speculative buying, as indicated in the weekly COT IMM data. However, a big chunk of it has come from central banks diversifying out of the US dollar, according to reports from financial institutions.

The Australian dollar is attractive to central banks because it has solid public finances, unlike the US, UK, and certain euro zone members. Moreover, Australia is a big exporter of raw materials to several emerging market economies. For these countries, buying the Australia dollar is grabbing a claim on Australia’s bountiful natural resources.

Central banks tend to make their moves methodically and gradually, so their influence on the Australia dollar will be one of steady support.

“The AUD is increasingly viewed as a reserve currency and less as a high beta risky currency,” said Greg Gibbs of Royal Bank of Scotland.

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