For the first time in almost 30 years, we have seen the Australian dollar break through, and hover around, US$1.  The September quarter saw our currency appreciate almost 14%.  Why is this and what does it mean for the Australian economy and investors.

 

Why

 

There are several key reasons for the recent changes in the value of the Australian dollar:

 

• Major Western currencies such as the US dollar and British pound have weakened.

 

• Commodity prices are strong, fuelled by continued economic growth in emerging economies, and this supports Australia’s resource-based economy.

 

• Despite our small population, the Aussie dollar is the world’s fifth most traded currency.

 

• Our interest rates are way above those in the US, the UK, Europe and Japan and this attracts foreign inflows.

 

• In the wake of the Global Financial Crisis, the general international view of Australia has changed from that of a small, inflation-prone and poorly managed economy to that of a well-managed, stable and comparatively low debt, low inflation economy.

 

The Good and the Bad

 

For a start, it is good for Australian consumers as imports cost less.  This in turn helps to control inflation, which will take pressure off the RBA to increase interest rates, providing some relief to those with mortgages.

 

The ‘bad’ factor is that domestic companies that export goods or those that compete with imports will suffer.  Other vulnerable industries include education and tourism.

 

Larger companies that are vulnerable to a strong dollar may be slower to adapt to these conditions, and as such, may experience some pain.  Smaller companies are generally more nimble and can adjust faster.  Either way, vulnerable companies will be forced to be more competitive, innovative and increase productivity to survive and thrive, which is not a bad thing.

 

On the balance, given the strength of our economy, global conditions and the commodity boom, a stronger dollar is sustainable for the foreseeable future and doesn’t have to be damaging to our economy.

 

 

Source: The Retirewell Report, Vol. 13 No. 2 Summer 2010.

 

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Posted on 05/02/2011 by David Pointon