Dollar goes off…again

Andrew Pegler – 24 September 2010

It seems like just a few weeks ago that the dollar was sub USD 90c…hang on that WAS just a few weeks ago!!

Yes folks, the little-dollar-that-could recently surged past .96c in a 26-month high. But, as we have discussed, this comes with benefits and pitfalls. Ahh, such is life.

The AUD has risen more than 17% since May against the US dollar, thanks to a strong domestic economy, a weaker US economy and relatively higher local interest rates in comparison to those in the rest of the world. This creates demand for the AUD, further pushing up its value. The laws of supply and demand again, eh?

The good bits

Get on a plane. Overseas travel is cheaper because a higher dollar means you literally get more bang for your buck. So right now your massage on that idyllic Bali beach just went from not much to hardly anything and it’s time to book in that Easter Island lunar eclipse festival (but avoid the brown mushrooms). Meanwhile imports from iPods to Belgian chocolates and from nuclear submarines to BBQ’s big enough to see from space are also cheaper as the dollar climbs in value compared to other currencies. And, while the RBA doesn’t target a particular exchange rate, cheaper imports tend to keep inflation lower. So that’s a nice win� or is it? According to Glen it ain’t and he’s gone and spoilt the party again with a warning that interest rates are heading up. That cheaper Plasma means nought if you have no home to watch it in because you defaulted on the mortgage.

Piggy in the middle

In the middle are the farmers and the diggers and drillers who get a mixed bag. On the one hand, what farmers produce is less competitive against overseas buyers but on the other hand that American-made tractor has never been cheaper. Meanwhile, BHP and Rio Tinto are more insulated because they sell our dirt in US dollars. But they take a hit when they repatriate their earnings.

The badder bits

The regular currency whipping boys of manufacturing and tourism cop another hammering with the rise of the AUD. Manufacturers who export or compete locally with cheaper imports are squeezed as their product becomes more and more expensive. And the same goes for tourism.

The future?

The other week Bloomberg claimed the Aussie Dollar was the most overvalued currency in the world and with China taking new steps to reign in its property bubble and the bond market starting to waver there is fear in the air, folks, and the herd is getting skittish. That means a potential flight to the USD which will see the Aussie go down and rates to go up – a spiral that could get very ugly, very quickly.