When Donald Trump threatened tariffs on European allies during the Greenland dispute, the Australian dollar increased in value against its US counterpart.
The movement was odd, given the Australian currency typically falls during periods of global unease.
Once Trump withdrew his tariff threat after claiming a “framework” deal had been reached, the Australian dollar increased again.
The short-lived geopolitical crisis showed that bad news (Trump threatening tariffs) was good news for the Australian dollar, and good news (Trump removing that threat) was also good news for the Australian dollar.
It is a theme that has been happening since Trump’s inauguration.
‘Sell America’
When Trump started his latest term one year ago, the Australian dollar was trading below US63c. It is now well above US68c, representing a strong counterintuitive rise over 12 months.
At the time of the inauguration, there was much talk of the “Trump trade” that was supposed to fuel interest in the greenback through a high-growth economic agenda.
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That has been replaced by the “sell America trade” whereby investors move money out of US assets, including its currency, due to heightened economic and policy risk linked to the Trump administration.
This point was made by the Danish pension fund AkademikerPension during the week when it announced it would sell its holding of US Treasuries, worth some US$100m, blaming weak US government finances.
The notable exception to criticism of the US economy is the booming artificial intelligence-led technology sector, which has helped underpin growth in equities and its broader economy.
The “sell America” sentiment has gained momentum in recent weeks due to the Greenland tariff dispute, the US government’s attack on the independence of the Federal Reserve and enduring concerns over government debt levels.
Against that backdrop the Australian dollar has prospered.
AMP’s head of investment strategy and chief economist, Shane Oliver, says in a “normal crisis” the US dollar would go up due to being a traditional safe haven.
“The difference is that this period of uncertainty was at its core seen as negative for the US,” says Oliver.
“Each time Trump does one of these erratic things, starting with the tariffs last year, attack on the Fed, attack on universities, attack on immigrants, attack on the rule of law and attack on global institutions, US exceptionalism is eroded and investors demand a risk premium to invest in the US.
“This puts downward pressure on the US dollar.”
Go for gold
The “sell America trade” has strong crossover with another strategy called the “debasement trade”, which is based on the belief the US currency is losing its status as a trusted safe haven due to massive government debt and persistent inflation.
One of the popular responses to this debasement is to buy gold, which is on a record price run.
Australia’s mineral-tinged currency is a way for investors to get exposure to gold and silver, which is another in-demand precious metal. Australia also has a massive iron ore sector, where prices have proven resilient.
The Sydney-based financial markets commentator Michael McCarthy says commodity prices are much higher than forecasters expected when making predictions a year ago.
“All of those commodities are trading at much higher levels than what was forecast and that’s feeding into investment markets,” says McCarthy, from online trading platform Moomoo.
“It’s one of the reasons why the Aussie dollar is strong because we’re a big commodity exporter.”
Australia’s robust jobs market is also pushing the Australian dollar higher as it has fuelled concerns the economy is too hot and the Reserve Bank may need to raise interest rates as early as next month.
In general, an interest rate rise increases the value of a currency.
Meanwhile, the Federal Reserve is expected to lower rates, creating a divergence in the outlook of the US and Australian central banks.
All of these factors have made the Australian dollar a standout performer since Trump’s inauguration, and plenty of analysts expect it to rise further, albeit not in a straight line as it has over the past week.
But the outlook can change quickly, especially when it comes to interest rates. If any global skirmishes turn into a major economic event, the Australian dollar could be sold off heavily, as it was in the global financial crisis.
In such a scenario, demand for commodities would fall, which would severely dent exports and the value of the Australian dollar.
• Jonathan Barrett is Guardian Australia’s business editor
