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PLUNGE: Australian dollar (A$) sheds 1%: What it means for you

The Australian Dollar ($A) (AUD) is being tested again today as it plummets in value compared to the US greenback.

When the share market closed on Wednesday, one ‘Aussie’ dollar was fetching roughly US76 cents but has since fallen back to US75.22 cents, representing a decline of more than 1%. As you can see in the chart below, it’s still trading well above its levels from late in December (where it fell below US72 cents) but is at least moving in the right direction.

Source: Google Finance

Source: Google Finance

What’s happened?

Broadly speaking, prospects of rising interest rates in the United States have helped to force the AUD lower over time. However, two other specific factors appear to have played a role in the dollar’s overnight plunge:

  1. Strong private-sector payrolls report in the United States, providing further support for an interest rate hike in that country; and
  2. Plunging commodity prices – particularly iron ore which slipped 2.9% to US$87.19 a tonne overnight, according to The Metal Bulletin.

Indeed, it was only recently that the iron ore price looked as though it could rise above US$100. As one of our most important trade commodities, a heavy decline in its price could impact the Australian economy’s growth, thus reducing demand for the AUD.

What it means…

A weaker Australian dollar is generally considered to be a good thing for our economy. A weaker currency makes our products more competitive on a global scale, thus boosting exports, while it should also help to attract more tourists who are then also encouraged to spend more money on our goods and services. That should be good for businesses such as Crown Resorts Ltd (ASX: CWN).

Meanwhile, it should also be good for businesses that generate a significant portion of their earnings overseas (their earnings are worth more in Australian dollars when repatriated back to Australia). That includes businesses such as Cochlear Limited (ASX: COH) and Altium Limited (ASX: ALU).

On the other hand, a weaker dollar could weigh on net importers. A number of retail businesses fall into this category.

Foolish Takeaway

There is no way of knowing where the Australian dollar will go in the short term. However, if commodity prices continue to fall, and the prospects for an interest rate hike in the United States continue to grow, we could see the AUD fall further from here.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia owns shares of Altium. 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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