The sky isn't falling, only the dollar Catalyst for the crash: Chairman of the US Federal Reserve, Ben Bernanke. Australians' feelings about the economy rise and fall with the dollar. When it strengthens, consumer sentiment usually does too. When it falls, we start to wonder if there is something wrong. For many it is a national report card, a symbol of our economic vitality. When the dollar's fortunes changed and it surged above parity with the US dollar about 2½ years ago, Australians celebrated by travelling overseas in record numbers and splurging on imported goods. The mighty dollar was a factor in the high penetration of smartphones and tablets in Australia. The exchange rate was also doing its economic duty, rising to keep a cap on inflation as the economy was supercharged by a once-in-a-century mining boom. It peaked close to US111¢ in mid-2011. Financial markets are always most volatile in periods of significant change. But as the period above parity dragged on, exporters struggled in global markets and jobs were threatened. It dawned on us that the costs of a super-strong currency might outweigh the benefits. As commodity prices sagged, the high dollar turned from being a symbol of strength to an economic burden. "Things are going to change": Robert Rennie, Westpac's chief currency strategist. Photo: Anna Chen Business leaders and economic officials expressed relief when the dollar slid below parity with the US dollar last month. But would it stay down? Events this week suggested it would. The little Aussie battler was smashed in the early hours of Thursday after the chairman of the US Federal Reserve, Ben Bernanke, said the flood of cash the US government had been pumping into the economy would be "tapered" later this year and end altogether next year if the US economy continued to improve. The US central bank had been pumping an extra US$85 billion into the financial system each month to stimulate the world's biggest economy, which is still recovering from the global financial crisis that hit half a decade ago. Bernanke's statement triggered an earthquake on global financial markets as investors reacted to the prospect of a world without the Fed's huge stimuli. The dollar lost more than US4¢ in a day and, at about US92¢, is more than 12 per cent lower than in April. Sharemarkets plunged, with Australia's suffering one of its biggest one-day falls in a year. "Financial markets are always most volatile in periods of significant change," Westpac's chief currency strategist, Robert Rennie, said. And Bernanke has put us on notice that things are going to change. The reason Bernanke's comments hit the dollar was that they signalled official interest rates in the US would rise as its economy strengthened. In anticipation, the interest rates on long-term US bonds jumped, making them more attractive to global investors who must buy US dollars to acquire them. That boosted the greenback's value relative to other currencies, including Australia's. At the same time, sentiment turned against the Aussie dollar as the effects of the mining boom began to fade and growth slowed. The currency also lost ground against other major currencies, including the yen, the euro and the pound. The dollar briefly slipped below parity in both 2011 and last year only to rebound above that benchmark. This time it seems different. Traders sense a marked shift in sentiment towards the Australian currency. AMP Capital chief economist Shane Oliver thinks faith in the dollar started to erode last month when the Reserve Bank announced an unexpected interest rate cut and the federal budget revealed bigger deficits than many expected. Most forecasts now do not think the dollar will bounce back above parity this time, although views on where it will settle range from about US95¢ to below US80¢. The dollar's fall is good news for the economy because it makes important export industries more competitive. That promises to stimulate investment and demand for jobs in globally exposed industries such as tourism, international education, agriculture and parts of manufacturing. Deloitte Access Economics' Chris Richardson says historical averages suggest a 10 per cent fall in the dollar's value will add about half a percentage point to the nation's growth rate and help generate another 50,000 jobs. Other economists say the dollar's recent fall will have a comparable impact on the economy as a large cut in interest rates. There is no doubt the Reserve Bank is happy with the dollar's fall, so long as it does not turn in to a disorderly rout. But there will be negatives. The cost of travelling overseas will jump and there will be pain at the petrol station. CommSec economist Savanth Sebastian says motorists should brace for petrol prices to jump to about $1.50. "At those sorts of levels it does put a bit of stress on household budgets," he said. Buying goods online from overseas will be instantly more expensive. Local retailers have also warned shoppers that imports such as electronic gadgets and whitegoods will cost more. "In the March quarter we saw the biggest period of discounting in 13 years," Sebastian said. Well, that's not going to be repeated. Because a lower dollar increases the price of imports, a sustained fall will put upward pressure on prices across the economy over time. That may prevent further interest rate cuts and eventually make interest rate rises more likely. Matthew Hassan, a Westpac economist who analyses the bank's monthly survey of consumer sentiment, says consumers still like the dollar to be strong. "Consumers view it as a global assessment of our relative performance," he said. But the dollar's long stint above parity with the greenback has challenged the perception that a high exchange rate is always good, as least for some. "There may be a growing understanding that a lower currency can be a positive," Hassan said.