The Australian dollar, not oil or interest rates, is now the biggest imponderable for Australian business. Just as we moved high oil prices and inflation to the back of the agenda, the plunging value of the Australian dollar will force us to keep oil and cost pressures in the forefront of our mind.

Exporters will be having a quiet cheer, the pressures of a 98 US cent Aussie dollar and the prospect of parity with the US currency have been relieved by the 10 USc drop in the value of the local currency in the past three weeks. The Aussie fell more than 4% last week alone against the US currency and the loss since its peak last month is now well over 10%.

The currency closed at 88.85 USc in New York early Saturday morning, down sharply from the close the previous Friday of 92.92 USc and 95.84USc the Friday before that in Australia. Seeing the currency peaked at over 98USc in early July, it has been a very sharp fall in almost a month. It fell further this morning in local trading to 88.60 US cents.

Suddenly exporters are getting more for their exports, while importers are having to pay a bit more, including importers of oil and petrol. The impact will be small to start with, but with the US dollar now on a major rebound against the rest of the world, a fall to below 85 USc must be in mind for many analysts. The US dollar’s dramatic rally this past week has prompted some investors to say its seven-year slide may be over, as the focus shifts from US economic woes to the spread elsewhere of the credit crunch-inspired slowdown.

The greenback had its biggest weekly gain against the euro in eight years last week. Friday saw its biggest one day gain in six weeks.

The currency fell under $US1.50 in Australian trading this morning as the rebound continued. The euro fell 3.6% to $US1.5005 Saturday morning, from $US1.5564 on August 1, the biggest weekly decline since January 2005.

But just because the greenback posted its biggest gain against the Euro in almost eight years doesn’t mean it won’t be hit by reminders about the poor state of the economy, that looming $US482 billion budget deficit next year and falling home prices and lending.

Nervous investment banks are telling clients to quit their anti US dollar positions and to get some sort of insurance as the currency rises.

But the nervy nellies should remember the chances of the US rebounding strongly and settling down to a sustained burst of low inflation growth are as good as the Republicans winning the US Congressional elections this November: it won’t and can’t happen given the economy’s severely depleted state.

US banks have no lending capacity and still need tens of billions in new capital (and face huge losses from a series of settlements with regulators on their dodgy behaviour in things called auction-rate bonds).

The car industry is crippled at the moment, as are airlines. Retailing is slack, home lending non-existent, while personal debts on credit cards and car leases are soaring.

Analysts say that since September 2000, the greenback has fallen 44% in value as inflation has risen to an annual 5%. Growth has fallen to 1.9% and US interest rates provide no reason to hold American dollar denominated assets. (Even if the Reserve Bank of Australia cuts rates you can still get 6.75% or 7.0% investing in Australian securities, compared to 2%-4% in US Government debt.)

Michael Knox of ABN Amro Morgan says:

We think that when the US economy gets into the fourth quarter of this year, and the weakness of economic growth is apparent, investors will desert the $US and look for higher yielding currencies like the Euro, Sterling and the Australian dollar.

The issue is not that the Australian dollar goes up. The issue is that the $US is weak and falls against practically everything else. This view of a weak $US in 2009 is reinforced by the outlook for the US budget deficit.

This week will be crucial in determining whether the dollar has broken free from its six-year downward trend, with a series of statistics in the US that will help work out how the economy is placed: we will have retail sales for July, Wal-Mart quarterly sales (and for some other leading retailers), consumer inflation, industrial production and consumer confidence.