Australian dollar plunges to 2-month low: How far will it fall?

Credit: Federalreserve

Much to the dismay of holiday-goers and online shoppers, the Australian dollar is once again declining at an astonishing rate with the currency threatening to fall below US 73 cents overnight.

According to Yahoo! Finance, it hit a low of just US 73.03 cents this morning – its lowest level in two months. Although the dollar has since rebounded marginally, it remains well below the US 77 cents it was trading at just one week ago and has put a cross through many forecasts suggesting it would quickly rise above US 80 cents.

Instead, analysts are becoming more inclined to believe the dollar will continue its rapid descent, suggesting it is now more likely to drop below US 70 cents.

The dollar’s sharp decline has come about after the Reserve Bank of Australia’s surprise interest rate cut last week. The cash rate is now sitting at a record low of just 1.75% and, with some economists suggesting it could fall to a mere 1% in the near future, foreign investors are beginning to sell their Australian dollars in search of more stable returns.

A lower Australian dollar is typically regarded as a bad thing for a number of local retailers, many of which import their goods from foreign suppliers. An example of course is specialty fashion retailer Lovisa Holdings Ltd (ASX: LOV). Its shares were crushed after it issued an earnings downgrade in January.

While the declining dollar may also dampen some Aussies’ international holiday plans, there are a number of investors for whom the move will come as a relief.

In today’s globalised world, there are a number of ASX-listed businesses that generate a considerable portion of their revenues and earnings in overseas markets. When their earnings are repatriated back to Australia, the earnings are actually worth more in Australian dollar terms.

That would at least partially explain why shares of companies such as Cochlear Limited (ASX: COH) and Blackmores Limited (ASX: BKL) have performed so strongly over the last week or so. Others including Westfield Corp Ltd (ASX: WFD) and CSL Limited (ASX: CSL) have also risen, although they could still represent decent value for long-term investors.

The Australian dollar hit a low of just US 68.28 cents in January this year. Although it is no certainty to get back there, low inflation rates locally and the prospect of further interest rate cuts do increase the likelihood that it will. As such, it could be time to consider how you can position yourself to profit from the trend.

One other company that generates a significant portion of its earnings in foreign markets has recently been named The Motley Fool's Top Stock for 2016. This company is not only poised to benefit from the falling Australian dollar, but also what is being touted as one of the biggest new markets in the history of modern business. Simply click here to learn its name and ticker code -- Yours FREE!

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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