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FINANCE | Australian dollar affects everyone

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by Robert Goudie
You might think only importers and exporters pay attention to the value of the Aussie dollar, but movements in the exchange rate affect us all.
After peaking at US$0.81 in late January 2018 the Australian dollar fell as low as US$0.70 in October, also falling against several other currencies.
A falling Aussie dollar makes it more costly to travel overseas and increases the local cost of imported goods.
On the upside, it makes many of our exports less expensive for foreign buyers, giving a boost to our farmers and other exporters.
The reverse applies in the case of a rising dollar, but movements in exchange rates don’t just influence our living costs.
Most people with superannuation will have a portion invested in overseas assets, and changes in currency values can also influence the performance of retirement savings – a lower dollar boosts the local value of our overseas investments while a higher dollar has the reverse effect.
So what are the main influences on exchange rates? Ultimately it comes down to supply and demand, and that can be determined by a number of things:
1. Interest rates. Imagine an Australian investor earning one percent interest on her money. She looks across the Pacific and sees that she can earn two percent in the USA. Here’s an opportunity to double her income. To do so she needs to buy US dollars, increasing demand for the ‘greenback’ and thus increasing its value against the Australian dollar. Exchange rates respond quickly to both actual changes in official interest rates, and to expectations of where interest rates in different countries are heading.
2. Commodity prices. From wheat and wool, to iron ore and natural gas, Australia produces a wealth of commodities. When demand for materials falls, less money flows into Australia, and with decreased demand our dollar falls in value.
3. The economy. If the economy is doing it tough the Reserve Bank of Australia may drop interest rates to encourage borrowing and stimulate investment. This takes us back to item 1. A weak economy relative to other countries attracts less overseas investment, causing the local currency to fall.
4. Politics. Elections and referenda can create a climate of economic uncertainty that investors, on the whole, don’t like. However, if the market thinks that a more business-friendly government is likely to be elected, this could boost the value of our dollar.
5. Fear. In times of market volatility and global political upheaval, investors flock to the US dollar as a ‘safe haven’ currency. Most other currencies, including ours, usually fall relative to the US currency.
But it’s not that simple
Other things can influence currency values, such as speculation or central bank intervention. There’s also a lot of interaction between the influences outlined previously. For example, strong commodity prices might give a boost to the economy, which leads to higher interest rates.
Throw in some political uncertainty add a touch of speculation and things quickly become very complicated.
So, will the Aussie dollar rise or continue to fall? History suggests flipping a coin might provide as useful an answer as following the opinions of ‘experts’.

The entire November 21, 2018 edition of The Weekly Advertiser is available online. READ IT HERE!

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Posted on Nov 21 2018

Posted by on Nov 21 2018. Filed under Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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