The falling Australian dollar has captured much of the financial media's attention recently with the local currency having fallen more than 18% versus the US greenback since July. Despite the severity and abruptness of the drop, economists are saying that the dollar could have even further to fall over the next 12 months.
As it stands, one Australian dollar is buying 77.7 US cents – its lowest price in more than five years. The falls have been exacerbated by the commodities crisis and fears of slowing global growth.
The Reserve Bank of Australia has been calling for a weaker currency for years in order to rebalance the local economy. Given the brutality of the dollar's fall over the last seven months however, it's worth looking at some of the pros and cons of a weaker Australian dollar.
Pros
- As commodity prices are quoted in US dollar terms, a strong US dollar will help offset some of the effects of the commodities crisis. This should help companies such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
- A lower Australian dollar will also help promote inbound tourism, whereby overseas holidaymakers will get more bang for their buck on Australian turf. Companies such as Crown Resorts Ltd (ASX: CWN), Echo Entertainment Group Ltd (ASX: EGP) and Village Roadshow Ltd (ASX: VRL) all stand to benefit.
- Australian companies which generate a significant portion of their earnings overseas (including Westfield Corp Ltd (ASX: WFD) and ResMed Inc. (CHESS) (ASX: RMD)) will receive a boost in profits. As they repatriate their earnings back to Australia, it increases as a result of the weaker exchange rate.
- As reported by The Fairfax press recently, the weaker dollar has assisted most Australian superannuation funds. This is because of the significant amount of global equities held by most funds.
Cons
- If you were planning on travelling overseas anytime soon, you'll be kicking yourself for not buying US dollars earlier. Outbound travellers must now either increase their travel budgets, or settle for less spending money once they reach their destination with the Australian dollar now buying far less US dollars than it was just months ago.
- With the dollar having fallen within a few cents of the Reserve Bank's 75 US cent target, the likelihood of further rate cuts may diminish. That's bad news for borrowers and could lessen the appeal of high-yield dividend stocks amongst investors.
- Unfortunately for many retailers, a weaker dollar isn't all good news. Many retailers, including JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN), import their goods from overseas, so a lower dollar will mean higher costs. These costs could well be passed onto consumers.
- Australian consumers have embraced the rise of online shopping in that they are offered lower prices and a wider array of products to choose from (not to mention convenience and often free deliveries). However, this has become more of an expensive way to shop as the Aussie dollar has weakened – shoppers may have to trudge back down to their local shopping centre instead.
