The Australian dollar jumped to a four-month high overnight and the local currency is now trading around US93.7c. Commonwealth Bank of Australia (ASX: CBA) currency strategist Joseph Capurso expects the currency to climb to over US95c this year. The Australian dollar has proven to be extremely resilient in recent months despite many currency analysts forecasting a decline towards US85c.
What companies will benefit from a rising Australian dollar? Importers and retailers such as Reject Shop Limited (ASX: TRS) and JB- Hi-Fi Limited (ASX: JBH) will benefit as the cost of importing products from overseas falls. However, it should be noted that given retailers often hedge up to a year in advance, the impact of a rising dollar can take some time to be realised.
Leading Australian travel agent, Flight Centre Limited (ASX: FLT) should benefit as Australian consumers take advantage of cheaper overseas travel. The company has been a huge beneficiary of the high Australian dollar over the past five years and has recently delivered record earnings.
However, on the flip side, many Australian companies will be negatively impacted from a higher Australian dollar. Companies which derive the majority of their revenue offshore will be impacted as earnings are converted back into Australian dollars, for example ASX-listed healthcare giants, CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH). Mining heavyweights, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) will also see earnings negatively impacted as they derive a large portion of their revenues in US dollars.
Foolish takeaway
I would never invest in a company based on currency movements and predictions. Forecasting the currency is always going to be a gamble and involve risk. While some companies may benefit or suffer in the short term from movements in the exchange rate, in the long term, a company's earnings growth and share price will be driven by the quality of the underlying business. Long-term investors should instead focus on investing in quality companies to hold for the long-term.
