Has the Australian dollar’s sharp rally finally come to an end?

Credit: Benny

Some of the heat has finally been taken out of the Australian dollar, which experienced a welcome decline overnight.

According to figures provided by Yahoo! Finance, the Australian dollar was down 1.1% at US 75.3 cents. That compares to a peak of around US 76.8 cents late last week, and about US 76.5 cents on Wednesday.

But it wasn’t so much that the Australian dollar weakened, but more so that the US greenback found a renewed strength.

That came after comments from some of the US Federal Reserve board members who provided rather hawkish comments regarding the need for more interest rate hikes this year, reversing some of the impact of Janet Yellen’s (chairwoman of the Fed) comparatively dovish message last week.

Yellen suggested there could be up to two more hikes this year, as opposed to the market’s expectations of three.

The Australian dollar is still trading at a 10.3% premium to the low it achieved in January at just US 68.3 cents, but the overnight change was certainly a move in the right direction. That comes after comments from Stephen Miller, BlackRock’s head of fixed income for Australia, who was quoted by The Sydney Morning Herald (SMH) as saying he doesn’t believe the Australian dollar’s rally would last.

He said, “The Aussie dollar is a volatile currency, it’s sometimes a case of five steps down and two steps up… We’re in the two steps up phase and the next phase will be the five steps down phase.”

Indeed, a weaker Australian dollar is what we need right now. While it mightn’t be ideal for international travellers or net importers of various goods and services, it will bolster foreign demand for those products and services produced domestically. That is clearly a good thing for our miners and other exporters, not to mention the domestic travel industry.

It is also good for local investors in businesses such as Cochlear Limited (ASX: COH) and ResMed Inc. (CHESS) (ASX: RMD), which generate a large portion of their earnings overseas. As they repatriate their earnings back to Australia, local investors benefit from the favourable exchange rate. Of course, it also means that now might be an ideal time to top up holdings of these two high-quality health care companies – before the dollar sinks.

The SMH recently noted that BlackRock’s Miller thinks the dollar will fall to US65 cents, “and probably lower” by the end of this year. Others are convinced it will be trading at a level closer to US70 cents but the common consensus is that it’s going down in the foreseeable future.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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