Aussie dollar friend or foe

Published in the Adelaide Advertiser, May 2011 by Karina Barrymore

The mighty Australian dollar continues to trade at near record highs, but it wields a double-edged sword, with winners and losers in the investment and consumer markets.

For international tourists and people buying overseas goods, the strong Aussie dollar is good news as it makes overseas items cheaper to buy.

And even for stay-at-home motorists the strength of the dollar is good news, helping to offset some of the global rise in oil and petrol prices.

CommSec says if the Aussie dollar had remained level dollar-for-dollar with the US currency, prices at the petrol pump would be an additional 11c a litre.

"Exporters and investors may not like our soaring currency but the Aussie dollar is clearly the motorist's friend," a new report by CommSec says.

For Australian investors, the benefits of a strong dollar will depend what side of the investment equation you are on.

Shareholders in consumer companies and importers should see higher profits and boosted dividends flow through as these companies benefit from the cheaper prices of overseas goods.

"With the strong dollar likely to bring prices down further, this sector could entice more spending and, therefore, opportunities might come from businesses in retail spending and travel," Wealth Within analyst Dale Gillham says.

But on the downside, companies that rely on selling their products overseas may face fewer customers as the cost to buy the same goods has risen.

"The biggest losers are the exporters but, given Australia is no longer a strong manufacturing nation but rather a raw materials supplier, the overall effect of a strong dollar is less now than in decades gone by," Gillham says.

"Our big exporters such as BHP and RIO already have forward contracts and trade those in US dollars, but it will be a matter of how well they manage the risk. My concern is for the smaller exporters or small businesses dealing in foreign markets and looking to expand," Gillham says.

The high cost of Australian goods also extends to domestic investments. Foreign investors may delay or back out of investing in Australia and domestic companies because these investments now cost them more to buy.

"Of immediate concern is how foreign investors react, as investing in Australia is now becoming more expensive and could result in a weak share market," Gillham says.

Commsec economist Savanth Sebastian says the strong Aussie dollar is already turning international investors away.

"The strength of the Australian dollar is a clear driver in deterring foreign investment and making it more attractive for Australian companies to invest overseas," he says.

"Total new foreign investment in Australia fell from $162.5 billion in 2009 to about $94 billion in 2010."

Back to Articles