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Why the Australian Dollar is skyrocketing toward US75 cents

Something has put a rocket under the Australian dollar in recent weeks.

The local currency was trading for less than US72 cents late last month, down from more than US77 cents in November. But instead of continuing to slide, the dollar has rebounded strongly. Indeed, it’s up more than 1.1% during the latest session to almost US74.5 cents.

What gives?

Although a weaker dollar mightn’t be good news for travellers looking to book their tickets for overseas adventures, it is good for the Australian economy as a whole. A weaker currency makes it cheaper for foreign buyers to purchase our products (boosting exports) while it can also attract more tourists to our lands, bringing cash with them to spend.

A weaker dollar is also something that the Reserve Bank of Australia has been working towards, aided, in part, by their numerous interest rate cuts in recent times.

Indeed, there were a number of external factors that were also contributing to the dollar’s demise. For one, Donald Trump’s victory in the US Presidential election sparked expectations for substantial economic growth in that country (at least in the short-term), attracting money away from Australia and into the US, while expectations of further interest rate hikes in the United States also boosted demand for the US greenback.

However, Donald Trump held his first press conference in six months overnight where he largely omitted discussing his pro-growth economic policies. Many investors will likely be left wondering where that leaves them, with some perhaps doubting the legitimacy of those policies, thus weakening the US dollar against a basket of currencies.

At the same time, rising commodity prices have also helped to boost the local currency. Given that so many of our exports are represented by resources, stronger iron ore and coal prices can have a substantial effect on the currency itself.

What this means

Many investors are positioned to benefit from a weaker dollar via their ownership of ASX-listed businesses such as Cochlear Limited (ASX: COH), Westfield Corp Ltd (ASX: WFD) and ResMed Inc. (CHESS) (ASX: RMD). Because these businesses (and many others) generate the majority of their earnings overseas, their Australian-reported profits benefit from the exchange rate. In other words, a stronger dollar could impact their returns if sustained.

It is inherently difficult to determine which way a currency will travel – particularly when it is based on factors such as commodity prices, US interest rates, and now, the decisions of president elect Donald Trump.

That said, there are numerous signs that suggest the Australian dollar will remain weak against the US greenback, and could fall from here. For instance, the US Federal Reserve is tipped to increase interest rates while the Reserve Bank of Australia will likely look to keep theirs unchanged (or could, perhaps, decide to cut further). It is also suggested that the rise in commodity prices are not fundamentally supported, which could put pressure on the currency over the coming 12 months.

Currency movements are a risk that investors need to consider when investing in businesses that operate around the globe. As such, investors should always ensure they spread their risk and maintain a diversified portfolio.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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