What a falling dollar means for you

The Australian dollar has fallen more than 15% against the US dollar over recent months, according to the Reserve Bank of Australia.

Dollar plunged

When the dollar plunged more than 10% in May and June this year, the hearts of many Australians contemplating overseas travels sank with it. Stories from people travelling to the US with empty suitcases subsided while the gloss started to rub off the bargains being picked up by online shoppers buying from overseas websites.

Hip pockets taking a hit

While Australians travelling abroad and buyers of overseas goods are generally the first to feel the effect of a falling Australian dollar, there are also less obvious but equally important ways it can affect your hip pocket. For a start, you may start to see a rise in the price of TVs, computers, mobile phones, clothing and other imported goods on shop shelves if the dollar stays down against the US dollar. Some economists say these price rises may even pose the risk of inflation down the track.

Not all bad news

However, the news is not all bad. BT Financial Group Chief Economist, Chris Caton, says a sustained fall in the Australian dollar tends to have a positive effect on our economic growth.
“As a rule of thumb, a 5-cent drop in the currency has a stimulative effect on the economy about equal to a quarter-point interest rate cut,” he says. “It makes our exports easier to sell, and makes domestically produced goods more competitive with those from offshore. Thus the decline in the currency to date should do the work of two rate cuts.”

How does it affect your investments?

A falling Australian dollar is also great news for investors with unhedged international investments. This is particularly relevant to investors in Super funds which tend to have a significant component of unhedged international shares, bonds and real estate.

Good news for listed companies

The effect on Australian share investments is less clear-cut. It’s generally good news for listed companies who generate most of their profits overseas, such as Coca Cola Amatil, Amcor, Brambles and Westfield, since they convert their overseas profits back into Australian dollars. Conversely, a sustained fall in the Australian dollar is generally bad news for listed retailers such as Harvey Norman, The Reject Shop and JB Hi-Fi since the price they pay in Australian dollars for products sourced overseas is likely to rise.

Raised interest rates

The effect on interest rate sensitive investments such as term deposits and bonds is also mixed. If the falling dollar translates to a rise in inflation, then it’s more likely the Reserve Bank will start to raise interest rates – generally bad news for bond investors and those locked into low term deposit rates. However, not all analysts believe that a falling Australian dollar necessarily leads to inflation.

Where to from here?

When the Australian dollar rose above the US dollar in November 2010, it was the first time it had been above parity since July 1982 and the first time it had been above the US dollar since floating in December 1983. Prior to 1982, it stayed above the US dollar since at least 1969, going as high as US$1.48 during the oil crisis in 1973. Since floating, it has gone as low as 46 US cents at the height of the internet boom in early 2001 when Australian was considered ‘old economy’ to as high as $1.10 in early 2012.

Fair value

BT’s Chris Caton believes ‘fair value’ for the Australian dollar is around 80 US cents. Advance Asset Management’s Felix Stephen says fair value for the Australian dollar is in the mid 80s to early 90s. However, some currency analysts have predicted the currency could fall to as low as 75 cents in the next 12 months.


The Reserve Bank of Australia says the currency remains over-valued, despite the recent falls. “The Australian dollar remains at a high level,” Reserve Bank of Australia (RBA) Governor Glenn Stevens wrote in the RBA’s Statement on Monetary Policy on July 2. “It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.” However, according to Mr Caton, it’s notoriously difficult to predict short term fluctuations in the value of the dollar. He points out the fall in May and June is the third significant fall in the past two years. “And each of them was quickly reversed,” he says.

Disappointing economic news

The falls in May and June have been largely attributed by analysts to falling interest rates in Australia as well as disappointing economic news from China, the largest buyer of Australian commodities.\


Winners and losers

Below is a list of some of the people and companies who will generally gain and lose from a fall in the value of the Australian dollar.



Investors in unhedged international investments Overseas travellers
Companies with majority of assets overseas Online shoppers buying from overseas websites
Companies who export Shoppers buying goods made overseas (eg computers, TVs, phones, cars)
Australian tourism Companies who import
Manufacturers Companies with overseas suppliers
The Australian dollar fell from $1.037 on 1 May to $0.926 on 29 July, a fall of 10.7%, RBA.
Reserve Bank of Australia “Statement by Glenn Stevens, Governor: Monetary Policy Decision” 2 July 2013
Source: BT Financial Group.

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