As this piece from The Drum (ABC) points out, Australia will be a 'victim' in this currency war because its dollar will appreciate greatly leading some overseas investors to recommend shorting the US dollar by buying AUD. But as The Drum piece notes our own Federal Reserve is under the false impression that a rising dollar is a bad thing - no doubt because it thinks our exports will suffer - so it is compensating by trying to pump air into our already overinflated and overpriced housing market.
But as this news piece reports, a stronger currency carries certain blessings such as keeping the price of food low.
Despite persistent complaints about the ever-increasing cost of living, Australia now has the developed world's fastest falling food prices, according to new research.
Food costs dropped 2.7 percent in the 12 months leading up to September, analysis of OECD data has found.
The falling prices are a dramatic turnaround after Australians suffered the fastest-rising food prices of the world's developed nations between 2000 and 2009.
The change could be attributed to fruit prices, which recently normalised after surging prices due to natural disasters in Queensland and Victoria.
But broader trends also contributed to the drop, with Australian food prices remaining contained compared to countries such as New Zealand, the UK and the US since the end of 2009.
University of Queensland economics professor John Quiggin said the reversal in prices was partly due to increased supply at the end of the drought and the strong Australian dollar.
"The appreciation of the dollar pushes down the prices of commodities, which pushes down the price for Australian consumers," Professor Quiggin said.
A strong currency also keeps other commodities low, like fuel.
Now for some basic economics. As von Mises pointed out many years ago, a strong currency doesn't necessarily make exports more expensive because a weakening currency is caused by inflating the money supply and hence drives up the cost of domestically made goods. From what I understand, this is because the cost of imported raw materials go up because of the weaker dollar and this makes the goods more expensive and hence offsets any advantage that the weaker dollar may have had against other currencies.
Japan and the US are two test cases. Whilst the US has debased its currency over recent years without hardly any improvement in its terms of trade, the Japanese Yen has been appreciating whilst its exports haven't suffered at all.
In this regard Japan provides an interesting case study. Despite decades of a strengthening yen, the domestic price level has remained stagnant. Deflation has more recently eroded the domestic price of goods in Japan. Foreigners, for their part, have to pay a higher price thanks to the appreciation of the yen. But they pay that higher price on fewer money units because of deflation. No harm, no foul, one might say.
Yet the effect goes further. Domestic Japanese producers have access to cheaper import markets. Located throughout a relatively small series of islands for one of the world's largest economies, Japan lacks many of the natural resources necessary to be a global powerhouse. A strong yen allows these producers cheap access to foreign resources, while maintaining their selling prices. Profits are strong as a result. Consumers benefit as well. Many Japanese are well-seasoned travelers, able to navigate the world, secure with their valuable yen. Japanese consumers are afforded a high quality of life — complete with great vacation pictures — thanks to the strong position they have in the world. This position is attributable to the yen.
If we want a good picture of the net effect of these two forces, we can turn our attention to the real exchange rate. Adjusted for the change in the Japanese price level versus the United States', the story of Japan's competitiveness becomes much more apparent.
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