The original ‘little Aussie battler’
The rapidly rising Australian dollar is great news for those looking to travel overseas, especially to the US, UK and Europe, but the opinions of economists are divided when it comes to how resilient the domestic economy will remain under these conditions.
At the time of writing, the value of $1 in Australian currency has passed the key US 90 cent level and is approaching parity as the chart below illustrates.
Source: www.indexmundi.com, developed from data sourced from the US Federal Reserve Bank of New York
A key reason for the rapid rise of our currency against the US dollar and other major currencies, such as the Euro and the British pound, is a result of the relative weakness of those economies compared with ours over the last few years.
While the comparative resilience of the Australian economy is to be applauded, a strong currency can have a negative flow-on effect for trade and industry.
The robustness of the Australian economy over the course of the global financial crisis can largely be attributed to the strength of commodities demand internationally, with strong growth in developing countries such as China fuelling demand for coal and iron ore.
Also, demand for education services from countries such as India has skyrocketed in recent years, with education nowadays among the top export earners for the Australian economy.
When the Australian dollar is rising (appreciating in value) imports become cheaper and exports dearer. While this presents a bonanza for those looking to purchase key imported goods such as cars, electronic goods and appliances, it is concerning for a commodities based economy such as Australia’s.
A rising Australian dollar that makes our exports dearer will dampen overseas demand for our goods in the short term. Over the medium term, however, the erosion of our competitiveness will undermine our ability to win key resource deals, which could seriously compromise Australia’s current level of economic prosperity.
A strong Australian dollar could therefore potentially have an adverse effect on local business performance. This is especially true for companies that are heavily exposed to export or currency markets, which could spell bad news for their share prices as well as dividend growth levels.
The stronger the value of our currency and the longer it stays at that level, the greater the damaging effect could be on economic growth and for investments.
The bright spot on the horizon is for investors holding gold and other precious metals. A rising Australian dollar will make gold purchases (which are generally priced in US dollars) comparatively cheap.
The perception that gold bullion is now priced at bargain levels has caused a sharp recent increase in demand, especially by Australian investors, which is contributing to gold prices being pushed to record highs. With increased demand for this precious commodity as a store of value in uncertain economic times and for its increasing use in industry as an electronic component, the investment outlook for gold appears likely to remain resilient.