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3 reasons why the Australian Dollar (A$) soared above US75 cents

The Australian dollar (A$) (AUD) appears to have found its feet, rebounding from about US73.4 cents this time last month to US75.48 cents today. That’s a gain of almost 3%.

A rising AUD will likely come as good news for some of the country’s retailers – particularly those which import a lot of their goods from other countries – as well as outbound travellers, who can purchase more foreign currencies thanks to the higher exchange rate.

However, companies such as QBE Insurance Group Ltd (ASX: QBE), CSL Limited (ASX: CSL), and Computershare Limited (ASX: CPU) generate a large portion of their earnings overseas. As a result, a higher Australian dollar could hurt their returns if it is sustained.

Here are three reasons why the AUD may have rallied over the past month:

  1. Economic Growth. The AUD rose after the Australian Bureau of Statistics said the economy grew 0.3% over the first three months of the year.
  2. Expectations. Meanwhile, the Reserve Bank of Australia also said “economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent” at its latest monthly statement on monetary policy.
  3. USD weakness. Notably, there has also been weakness in the US dollar against a basket of other currencies recently, which is thus helping to propel the AUD/USD higher.

With commodities prices such as iron ore retreating, however, there is no guarantee the Australian dollar will rise much further from here. According to The Metal Bulletin, iron ore was at US$55 a tonne overnight, down from almost US$100 not too long ago.

What’s more, with Australia’s interest rates stuck at 1.5% and US interest rates expected to rise steadily, a retreat from these levels by the AUD is by no means out of the question.

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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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