Looking at things in another way, a capital outlay of, say, $A100, as at 1 February 2000, invested in the stocks traded by The Share Trader would have been worth $A270 as at 31 December 2007; whereas the same $A100 invested in the stocks embodied in the All Ordinaries index, the Dow Jones Industrial Average, and the Nasdaq Composite Index, would have been worth $A207, $A121, and $A67 respectively. US bourses performed abysmally during the period.

To view the latest graph showing the monthly market value of The Share Trader's portfolio, click here. To read the latest analysis on the Australian bourse, click here, and that on the United States bourse,  click here.

Two main points ought be noted in respect of 2000, 2001, and 2002. The first is that, although the Australian GDP rose at a steady rate, the sharp fall in the All Ordinaries index noted in September 2001 reflected the response of the bourse to the terrorists' attacks in the United States on 11 September 2001. And the second is that the relative weakness in bourse prices noted during the whole of 2002 reflected lower investor, business, and consumer confidence as a result of apprehensions about the then faltering US economy impacting upon the Australian economy as well as the then looming US invasion of Iraq and its possible adverse consequences, particularly more terrorists' attacks. These points should help illustrate that, generally speaking, markets respond, not to existing known events or to those in the past, but to current expectations about the future. Those expectations at the time were pretty pessimistic during September 2001 and throughout 2002.

2003 saw the actual US-led invasion of Iraq, and the deep dip in equity prices.

Thereafter, during 2004 sentiment and expectations gradually improved as a result of war fears having subsided, leading to rising consumer, business, and investor confidence, all of which were reflected in rising bourse prices, that carried through to 2005, 2006, and to mid-2007.

From mid-2007, sentiment and expectations commenced to wane, as a result of the subprime mortgage credit crisis in the United States, that saw some of its financial institutions experience severe financial stress.

The market value of the Australian dollar, as measured in US dollars, fell during 2000, steadied somewhat during 2001, rose steadily during 2002-2004, fluctuated during 2005-2006, and then rose during 2007. This can be explained by the fact that interest rates were initially lower in Australia than in the US during 2000, and then increased steadily during 2001-2007 in response to the mounting foreign debt threatening to weaken the Australian dollar. All this can be seen more clearly by referring to the graph below, on the Australian Dollar  v.  Difference (Australian Interest Rates Less US Interest Rates), or by clicking here.

The downward movement in the market value of the Australian dollar was cushioned, and thwarted, by having a high interest rate differential between Australian and US interest rates. This differential increased further during 2002-2007, and the Australian dollar duly responded by increasing in value vis-à-vis the US dollar.

But during 2004-2007, a new economic parameter also came into being, namely, the sinking US dollar, which manifested itself by other currencies rising, including the Australian dollar. This added further complexity to the economic analysis.

But, overall, Australian interest rates really need to be much higher than in the US, and to be sufficiently high enough in order to stabilise the Australian dollar vis-à-vis the US dollar, as a result of Australia's huge foreign debt. This debt needs continuing funding by overseas investors, who require incentives (relatively high interest rates) to do so. This has therefore saddled Australia with a debilitating constraint in formulating and setting its economic policies. As a result, Australia has really lost much of its economic independence, something which the governing politicians are hardly likely to rush to admit to the Australian people.

To read the latest analysis on the Australian dollar, click here.  

This stability in the value of the Australian dollar, and its later strength, increased as the difference between Australian and US interest rates widened. This relationship is more readily apparent in the graph below, Australian Dollar  v.  Difference (Australian Interest Rates Less US Interest Rates). Or click here. However, during 2004-2006, the interest rate difference narrowed, thereby resulting in a somewhat stable Australian dollar rather than a rising one. During 2007, the difference widened, and so did the Australian dollar climb higher.

In essence, then, during the period, this interest rate differential was the main mechanism by which the imbalances in Australia's external account were being managed, and the steadily rising differential was really the incentive provided to foreign lenders in order to have them continue financing Australia's foreign debt.

It is this huge foreign debt, however, which is the main determinant factor influencing the value of the Australian dollar and Australian interest rates, and it is the high differential between Australian and US interest rates that then determines the movement, and its extent, in the value of the Australian dollar vis-à-vis the US dollar.

To read the latest analysis on the Australian dollar, click here, that on the Australian interest rates, click here, and that on the United States interest rates, click here.

To read the latest analysis on the Australian dollar, click here.

Looking at things in another way, a capital of, say, $A100 in Australian currency, as at 1 February 2000, would have been worth, as at 31 December 2007, $A138 in United States dollars, $A92 in European euros, $A145 in Japanese yen, and $A112 in United Kingdom pounds. Being able to acquire more foreign currency than previously with the same amount of domestic money, is generally known, in economics, as currency appreciation. So the Australian dollar has appreciated against all major 'free-traded' currencies except the euro.

Australian dollar v. United States dollar. The Australian dollar was weaker vis-à-vis the United States dollar until about September 2001 as a result of Australia's mounting foreign debt. These negative effects, arising from having this huge foreign debt, were subsequently countervailed by increasing both the Australian official interest rate as well as the interest rate differential between Australian and US interest rates, in order to make it much more attractive for foreign lenders to deposit and/or leave their moneys in Australia, thereby relatively strengthening the Australian dollar by such an inflow of capital. In consequence, the Australian dollar began to recover some of its previous losses, and continued its steady rise in value from its lows. This rising trend was further aided, up to December 2007, by the steadily weakening US dollar, brought about by the United States' ballooning internal and external balances, arising from its numerous wars and from the uncontrolled free spending ways ushered in by the Bush Administration. The US dollar was sinking principally because the United States was printing and spending and wasting far too much paper money, and was scaring off foreign investors away from their US dollar holdings and into those of the European Union's euro.

Australian dollar v. Japanese yen. The Australian dollar was weaker vis-à-vis the Japanese yen until about October 2000 as a result of Australia's mounting foreign debt. Then, owing to rising Australian interest rates, the Australian dollar began to recover some of its previous losses, and continued its steady rise in value from its lows. This rising trend was further aided, up to December 2007, by the sinking yen as a result of Japan's deflating economy and the weakened confidence in its domestic banks, which were carrying inordinate amounts of non performing loans.that should have been written off as bad debts long, long ago.

Australian dollar v. European euro. The Australian dollar was weaker vis-à-vis the European euro until about December 2002 principally as a result of the strengthening European euro, even though Australia's mounting foreign debt also played a major part. Then, owing to rising Australian interest rates, the Australian dollar began to recover some of its previous losses, and then stabilised during 2003 - 2007, no doubt aided by the perceptions of an impending boom in Australian mineral exports to China. Since 2000, however, overall the Australian dollar has fallen against the Euro, which is now fast becoming the international currency overtaking the fast sinking United States dollar.

Australian dollar v. United Kingdom pound. The Australian dollar was weaker vis-à-vis the United Kingdom pound until about September 2001 as a result of Australia's mounting foreign debt. Then, owing to rising Australian interest rates, the Australian dollar began to recover some of its previous losses, and continued its steady rise in value from its lows. This rising trend up to December 2007 was principally aided by the steadily weakening UK pound as a result of the United Kingdom's involvement in the wars that the United States was enmeshed in. In consequence, the UK pound tended to mirror the US dollar, which meant weakness and a steady decline in value.

Summary: An overall analysis of the movement in the Australian dollar is most difficult, mainly because different economic forces have been in play, not only in relation to other individual currencies, but also in relation to different years. But, overall, the Australian dollar has been impacted by the rising foreign debt that would drive the dollar down; by the relative high interest rates that would drive the dollar up; by the continued weakness in the US dollar that would drive the dollar up; by the failed free trade and globalisation policies of successive Federal Governments that would drive the dollar down; and by the perceptions or reality of major export income flows arising from the current minerals boom that would drive the dollar up.  Not easy, eh?  But I did say so.  And yet, in the wash up, the foreign debt continues to mount, with imports continuing to exceed exports, with no end in sight of a reversal.

To read the latest analysis on the Australian dollar, click here, and that on the United States dollar, click here.