Australian Dollar Shoots Up! (Or US Dollar Falls….Again)

In April, we wrote about how diamonds are traded in US dollars and therefore, prices are dependent on US dollar currency fluctuations.

Over the past month or so, the Australian dollar has been extremely volatile. At it’s peak, one Australian dollar was worth a little over 88 US cents. However, the so-called “sub-prime meltdown” had a disastrous effect on the Australian dollar – causing it to fall down to a low of 77 US cents.

This meant that from a high of 88 US cents, to a low of 77 US cents, diamond prices in Australian dollar terms went up by about 14 percent.

Between mid-August and mid-September the Australian dollar remained highly volatile against the US dollar, slowly gaining back what it had lost. However, with the US cutting interest rates by half a percent on Tuesday, the Australian dollar is now enjoying the highs we had in late July/early August. As of writing, the Australian dollar was worth 86.31 US cents – the perfect time to buy a diamond!

This situation raise two questions: how can diamond dealers deal with highly volatile currency markets and will diamonds ever shift away from being traded in US dollars?

Well firstly, the foreign currency risk is just like any other risk that a jeweller or diamond dealer faces. Just like we take out a “Jewellers’ Block” insurance policy, we can also guard against foreign currency movements by buying forward contracts with one of the many foreign currency agencies available (Travelex and AFEX come to mind). Forward contracts entail buying foreign currency at a specified price and using it up to a set expiry date. This protects against the Australian dollar going down, but if the Australian dollar goes up, then you loose out on the difference between the buy price and the expiry date price.

Secondly, diamonds aren’t likely to be traded in a currency other than the US dollar anytime soon – the diamond industry is just too conservative. However, cutters in India, miners in Botswana and everyone else outside the US still need local currency, thus a falling US dollar may well push prices up anyway.

This entry was written by Nikhil Jogia and was posted on on Thursday, September 20th, 2007 at 4:01 pm and is filed under Taking Care of Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.