The Australian Dollar ($A) (AUD) fell to its lowest point against the US greenback since January overnight, falling to just US74.8 cents. It has rebounded to around US75.2 cents in the time since.
Indeed, the AUD started the year at US72 cents and quickly surged to more than US77 cents by the middle of March. During that time, it was one of the best performing currencies in the world, but it appears to have lost some of its heat, retreating 2.6% since 21 March.
On the share market, that could provide a boost for the Cochlear Limited (ASX: COH) share price, the Westfield Corp Ltd (ASX: WFD) share price, the Amcor Limited (ASX: AMC) share price and the Reliance Worldwide Corporation Aus P Ltd (ASX: RWC) share price. All four have risen between 3% and 6% since 21 March, and some of those gains can likely be attributed to the currency movements given their foreign diversification (each of those businesses generate a lot of their income in the United States, and hence, benefit from a weaker Australian dollar.
Of course, those gains cannot entirely be attributed to the AUD's decline. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) itself has jumped 2.7% during that time, while other US-exposed shares such as QBE Insurance Group Ltd (ASX: QBE) and ResMed Inc. (CHESS) (ASX: RMD) have actually retreated during that time.
3 reasons why the AUD has fallen
There are a few likely reasons why the Australian dollar has fallen recently:
- Global tensions are mounting in relation to the conflict in Syria and on the Korean peninsula. This has helped to bolster the strength of the US dollar while weakening other currencies, including our own.
- Commodity prices are falling. Australia's economy is largely supported by trade in commodities, although they have been cooling in price recently. For example, the iron ore price plummeted 8.5% to US$68.04 a tonne overnight, according to The Metal Bulletin. That's down from almost US$100 recently and is likely weighing on the AUD.
- Interest rate expectations could also be a factor. In the United States, interest rates are expected to continue rising gradually while tax reform is also on the agenda. Locally, however, it is still unclear when the Reserve Bank of Australia may look to begin hiking interest rates.
What happens next?
If commodity prices continue to drop, and if interest rates in the United States continue to rise (while leaving Australia's own interest rates at around 1.5%), it would be reasonable to expect the AUD to continue to fall in value against the US greenback.
Although that wouldn't be great news for outbound travellers, it would be good for our own tourism industry and for our economy as a whole. This is because a weaker dollar makes our products and services more competitive on a global scale, helping to boost our exports and reduce our imports.
In regards to investors, companies that generate a lot of their income offshore (for example, in the United States) should also benefit. As we've seen with the QBE share price and ResMed share price over the past few weeks, that won't automatically translate into share price gains – at very least not immediately – but it should help to boost their profits in AUD-terms which should benefit investors over time.
