How can currency fluctuation affect you and your investments?
- Financial Planning
The Australian Dollar has had a wild ride in the last few years. However, what does it all mean for you?
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Looking at a graph of the Australian dollar’s movement against the US dollar in recent years it’s a bit like watching a roller coaster. After the financial crisis of 2007/8 it went into free fall from a value of just under one US dollar down to almost US$0.60 within a year.
By early 2011 it had clawed its way back up, breaking the magical parity threshold on the way, to a peak just under US$1.10. From those lofty heights the Australian dollar has tumbled lazily down to the low $0.70’s and some analysts say it may still have more to fall.
Economists and analysts certainly enjoy these fluctuations as good fodder for their commentary. However, what does it mean for the average person? Does it have any direct impact on your day to day life? Should it affect investment decisions? Here is everything you need to know in a nutshell.
There are both pros and cons to a low Aussie dollar
How is your purchasing power affected?
In a globalised economy, the effects of movements in the value of the Aussie dollar against other currencies can certainly have some direct impact in your buying power. The higher our dollar gets, the more power it has for buying overseas goods and services.
For example, when our dollar was valued higher than the US currency, it gave consumers greater purchasing power when buying online from the US. Similarly, a strong dollar means that our importers can get more for their buck, which theoretically means lower prices for consumers here.
International travellers from Australia also benefit when the Aussie dollar is higher, as they can buy airfares and accommodation more cheaply and have more spending power when shopping overseas.
Now that the value is in the doldrums - around 70 cents - it has the opposite effect, i.e. it is more expensive for us to buy from overseas.
What is the impact on the economy?
While the current state of affairs may not be ideal for consumers, it doesn’t mean there are some in Australia who relish a low dollar. Those businesses that manufacture goods or provide services to export to overseas markets will benefit from our product becoming more price-competitive for overseas buyers.
If exporters are happier it generally improves their ability to employ more people and to invest in their businesses, which is good for the economy and the taxman.
Another dynamic to be aware of is the effect interest rates can have on the value of the Australian dollar. Generally speaking, if interest rates rise it will attract more overseas money towards investing in Australia, which in turn can increase demand for our currency and put upward pressure on the Aussie dollar.
What about personal investments?
Fortunately, a weak Aussie dollar can mean good news for the personal investor in Australia if they have money invested in overseas assets, either directly or through a managed fund that hold assets such as international equities or property. Whenever these assets produce income or are redeemed, investors here will benefit when the proceeds are converted back to Australian dollars.
This is a good example of why diversification is such an important principle to follow for personal investors. If you have your investments spread over various markets and asset types you are well positioned to make gains when conditions are favourable in those markets.
Some investors may also be curious about the potential of investing directly in foreign exchange markets (a form of investment that involves buying and selling foreign currencies in an attempt to make a profit on exchange rate movements).
Despite the attraction of a potential to make quick gains, this type of investing involves considerable risk that may not be so appealing to personal investors and some would say it is more akin to gambling than investing. For this reason it is usually the preserve of specialists who take a close interest in currency markets and have the capacity to bear losses when they occur.
Those who seek the advantages of a diverse investment portfolio can benefit from the services of a professional financial planner
A planner has access to considerable research resources to help formulate an investment plan that suits your goals and to constantly monitor and review the many economic factors (such as currency movements), which can influence investment decisions.
What are your thoughts on the Aussie dollar’s wild ride? Join the discussion below.