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Is the weaker Aussie dollar a bane or boon for the economy?

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A weaker currency has produced a complicated list of winners and losers, writes Craig James

If there is one aspect of "finance" or economics that most Australians are familiar with, it's the Aussie - as our dollar is affectionately known. It generally features on TV and radio news reports and in the business sections of daily newspapers.

Up until the past few years, the Aussie dollar tended to dominate the consciousness only when someone was planning a trip overseas. And clearly for most people the key wish was for a stronger dollar to boost holiday spending power.

aussie dollar

Of course, in recent years, as more people have elected to buy foreign goods through the internet, there has been another reason to keep an eye on currency movements.

Like overseas travellers, local shoppers have wanted a stronger, not weaker, Aussie dollar.

And for much of the time in recent years, travellers and shoppers have had their wishes fulfilled. For the four years to September last year, the dollar never fell below US87c, in fact averaging an extraordinary US99c over the period.

But the Aussie dollar has fallen from grace, averaging around US80c since mid-November. A principal cheerleader for the Aussie dollar's descent has been the Reserve Bank (RBA).

Some people would see that as odd - doesn't a stronger economy translate to a stronger currency and vice versa?

And to some extent that is true. If the economy is strong, the RBA responds by lifting interest rates and the higher yields attract foreign investors as they search for the best returns globally. In response to the demand, the dollar tends to appreciate.

But, as always is the case, there are plenty of other factors at work. Our economy could hardly be described as weak. Sure, economic growth is below "normal" and the RBA has been cutting rates to boost growth. However, our interest rates are still high relative to other major economies.

Currencies are never viewed in isolation. For instance, the Aussie dollar is commonly assessed against the US dollar, or greenback. The US dollar is currently strong relative to most currencies because the economy has responded positively to significant stimulus.

The expectation is that US interest rates will need to rise. That expectation of interest rate movements is just as important for investors as the current differential in interest rates.

Our dollar is influenced by the level of, and expected movement in, interest rates but it is also affected by the prices of key raw material, or commodity, exports. And the king of Australian commodity exports is iron ore.

In response to both higher supply and lower demand, iron ore prices have plunged over the past year from near $US120 a tonne to less than $US50 a tonne. In response to the lower prices for iron ore (and other commodities), lower local interest rates and expectations of higher US rates, the Aussie dollar has been sliding.

But while shoppers may be lamenting, businesses are cheering. A lower dollar means exporters can compete more effectively against foreign goods. It means local goods can compete more effectively against imports.

And Australian retailers cheer a lower dollar because shoppers buy goods locally again in preference to buying them online.

For investors, a lower Aussie dollar throws up a variety of winners and losers. But it also throws up a raft of complications. A major resource producer cheers a lower currency because it boosts competitiveness. But the question is whether a lower currency offsets lower commodity prices. Further, does the producer hedge (protect itself) against currency changes? And how much extra will imported equipment cost?

There is a tendency to see clear winners and losers from currency changes. But in practice there are many complications. And investors need to do the sums before concluding that the weaker Aussie is a bane or boon.

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