The Australian dollar is trading below the US89c mark ? the first time it has done so in the last four months ? after having fallen as a result of ?jawboning? by the Reserve Bank of Australia?s chairman, Glenn Stevens, as well as the US Federal Reserve?s decision to reduce their US$85 billion a month stimulus measures on Thursday.
The Australian economy has been desperate for relief from the high Australian dollar, which has traded above parity with the US greenback for much of the last two years. Although a strong dollar encourages foreign investment, it restricts the earnings potential…
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The Australian dollar is trading below the US89c mark – the first time it has done so in the last four months – after having fallen as a result of ‘jawboning’ by the Reserve Bank of Australia’s chairman, Glenn Stevens, as well as the US Federal Reserve’s decision to reduce their US$85 billion a month stimulus measures on Thursday.
The Australian economy has been desperate for relief from the high Australian dollar, which has traded above parity with the US greenback for much of the last two years. Although a strong dollar encourages foreign investment, it restricts the earnings potential of companies that are heavily reliant on foreign markets for their revenues.
With the Fed deciding to reduce its monthly bond purchases from US$85 billion to US$75 billion, the US currency is set to strengthen which will weaken the Aussie dollar. Whilst it is currently valued at US88.62c, Stevens has stated that he would prefer to see it fall to around US85c.
With interest rates also remaining at a record low of just 2.5%, a further fall in the Aussie dollar would have a positive effect on our economic growth. A US5c drop in the local currency is roughly equivalent to a 25 basis point cut in the official cash rate.
Of course, the companies that would benefit the most are those which generate a significant portion of their revenues from overseas, including Westfield (ASX: WDC), Coca-Cola Amatil (ASX: CCL), Amcor (ASX: AMC), Brambles (ASX: BXB) or ResMed (ASX: RMD) – not to mention the miners such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) or Fortescue Metals Group (ASX: FMG).
However, the news isn’t quite so good for companies which must purchase their products from overseas. Retailers such as JB Hi-Fi (ASX: JBH) or Harvey Norman (ASX: HVN) could be impacted by the currency’s fall, although the lower dollar could also see a pick-up in spending in stores as opposed to online (where many of the stores are international).
While the dollar falls, foreign investors are likely to exit the market which could see the share market fall in the short-term, however, it would boost the earnings of many of the companies listed on the ASX in the longer-term.
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