Maybe central bankers are buying gold because their respective finance ministers are actively trashing local cash. “We’re in the midst of an international currency war, a general weakening of currency,” says Brazil’s Finance Minister Guido Mantega in today’s Financial Times. Exporting nations are trying to boost competitiveness by keeping their currencies cheap and the price of their exports low.

It’s a strange old world when you improve your economic strength by weakening your currency. Japan and other Asian exporters (dependant on credit-financed consumption in North America) have been doing it for years. But maybe not everyone got the memo from the stock market in 2008 than the global credit bubble has popped.

You have to wonder if the strong Aussie dollar will hurt the competitiveness of Aussie exporters. It will probably hurt some a lot more than others. By “others” we mean commodity exporters. For now, any rebound in global mining investment has not led to a huge new production increases in the key commodities produced by Australia (iron ore and coal). The strong dollar isn’t hurting a bit.

But Chris Richardson from Access Economics warns us not to take the high terms of trade and commodity boom for granted. “Australia’s fiscal finances, both short and long term, are hostage to the fate of commodity prices, and hence to China’s strength,'” he recently wrote. He added that Australia’s Federal budget depends on high commodity prices to end the deficit.

–“The return to surplus trumpeted in the official forecasts is a pure punt that China and India will keep growing faster than the world’s miners will keep digging deeper,” Richardson says. “The budget used to be stodgy and boring and responding to a whole range of economic indicators. Now its health or otherwise is very narrowly based on coal or iron ore prices, and that’s a very fickle thing to rely on for fiscal health.”

From Dan Denning in St Kilda for the Daily Reckoning Australia

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