The Australian dollar continued its strong run against its U.S. counterpart this morning, rising above 80 U.S. cents for the first time in over four months.
It has, however, dropped back a touch now and is fetching 79.7 U.S. cents at the time of writing.
Why is the Aussie dollar on a tear?
The reality is that this rise is less to do with Australian dollar strengthening and more to do with the weakening U.S. dollar.
This is evident when looking at the local currency’s performance against the euro, New Zealand dollar, and the British pound. When paired with these currencies the Australian dollar is largely unchanged.
Why is the U.S. dollar weakening?
That is the million dollar question and has many economists scratching their heads. The U.S. dollar index recently sank to a three-year low despite the fact that U.S. interest rates have been rising and look set to increase a further three times in 2018.
All the more surprising is the fact that the currency has resisted supportive factors that include a strengthening economy, U.S. tax cuts, and widening U.S. bond yields.
But if the Federal Reserve does follow through on three rate hikes in 2018 I don’t think it will be long until the U.S. dollar strengthens again. This could send the Australian dollar back below 75 U.S. cents again in a hurry.
Which will be good news for companies such as Aristocrat Leisure Limited (ASX: ALL), Treasury Wine Estates Ltd (ASX: TWE), and Appen Ltd (ASX: APX). These three companies in particular generate a significant portion of their revenue in the U.S. market and are likely to be given a boost from both favourable currency tailwinds and the U.S. tax cuts. This could make them well worth a closer look today.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Treasury Wine Estates Limited. 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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