Is a lower A$ bad news?

Posted: December 03, 2008

After reaching over 98 cents to the US dollar in July, the Australian dollar has fallen to below 65 cents. Investors and speculators have been selling Aussie dollars because of a drop in commodity prices, narrowing interest rate differentials compared with other countries, and a belief that other currencies are safer.

Some people and businesses will suffer. For instance, travellers going overseas will face higher costs and import prices will rise. Businesses will be paying higher prices for imported raw materials and equipment and may be forced to raise prices to maintain their margins. All things being equal, a lower exchange rate should lead to higher petrol prices. Fortunately, global oil prices have fallen over the same period leading to lower prices at the pump.

On the other hand, some people and businesses will benefit. Exporters such as manufacturing, agricultural, tourism and educational businesses will be more competitive against overseas providers. Local companies with overseas operations will do better. Current estimates suggest that about 30% of the earnings of the Top 200 companies are generated outside Australia. A 10% fall in the Australian dollar will mean a 3% increase in repatriated earnings and improved profitability. Higher earnings usually lead to higher share prices.

Most Australians have investments in overseas shares through their superannuation funds. A lower Aussie dollar will most likely have had a positive one-off impact on returns from international investments.

Economists are divided on where our dollar will go next. But this is nothing new!