Why a weaker dollar is good news

Andrew Pegler – 3 September 2010

The political kafuffle and those pesky global jitters have seen the AUD come off the boil a tad. But for an export-dependent country like ours this isn’t a bad thing.

A nation’s currency rises and falls depending on the performance of its economy and the sentiment of its investors. If everyone wants a piece of the action then it heads north. If everyone wants out it could fall lower than Whitney Houston piggy-backing a carpet snake. The laws of supply and demand. Right now the AUD is down from the heady days of possible parity and while this may seem like bad news, it’s not.

Increased exports

The weaker our currency the more competitive our goods. So if the AUD falls 10% in value against the USD Aussie exports are 10% cheaper to importers and therefore it’s more likely they’ll buy them. This is why China is pegging its currency below the USD.

This 10% depreciation also means we pay 10% more for our imports, which makes locally made products relatively cheaper, which is good for local producers and manufacturers who get a medium-term advantage, leading to more jobs and more spending. Plus having more money flowing into the economy from the boost in exports reduces the trade deficit (i.e. the excess of imports over exports or money in and money out).

More foreign investment in local companies and shares

If a currency continues to fall it also makes foreign investment in local companies and shares more attractive particularly if the currency is stable. This is because it costs foreign investors less to invest here. Generally they look for local companies with sound fundamentals and typically swoop when it looks like the dollar weakness is nearing an end.

Companies’ profits go up

Multinational Aussie companies like Pacific Brands, Cochlear, BHP etc., which earn a lot of money from overseas sales, earn more from overseas revenue they bring back into Australia because of the improved conversion rates.

More tourism dollars

A weaker currency helps to boost tourism because it’s cheaper to travel here. The lower Aussie dollar will be a great relief to this really important sector that has been smashed by the high AUD of late.

And finally…

Aussie firms have less competitive pressure to keep prices low and Australian bonds and shares become more attractive to overseas investors allowing governments and companies to raise longer-term capital more easily.

So see, it’s not all bad news.

And in other news… the latest data from the US government shows official Chinese holdings of US Treasury bonds fell from $938.1 billion last year to $843.7 billion this year. It looks like the Chinese are quietly reducing their exposure to the weakening USD. The rise of the RMB anyone?