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The Australian Dollar (AUD)

The Aussie dollar – How high can it go?

Nathan Lear
Partner/Private Client Adviser
1 May 2011

The Australian dollar has broken through the $US1.09 mark, breaking another record and trading at its highest level since the currency was floated in 1983. 

Many experts predict the Australian dollar will continue rising, with some even suggesting it may break through the $US1.20 mark. So what is pushing our dollar so high and can it keep rising? 

The rise in the Australian dollar is due to a combination of factors including strong commodity prices, high Australian interest rates and weakness in the US.

One of the major drivers pushing the Australian dollar higher is rising commodity prices on the back of strong demand from China. Commodities make up around 70% of Australia’s exports, therefore increasing the ratio of our export prices to import prices (known as terms of trade) and boosting our dollar.   

Another factor is Australian interest rates which are at 4.75%. This is well above rates in the US, Europe and Japan where the range is zero to 1.5%. Higher interest rates have the affect of attracting investment in Australia, which as a result pushes up the Australian dollar. 

So can the Australian dollar keep rising? 

Many people view current levels as unsustainable. However given the current conditions in Australia, we may be entering a new paradigm where the Australian dollar being above parity is in fact sustainable. Many estimates are based on a narrow period of time from when the Australian dollar was first floated in 1983, butthe fundamentals that drive the value of the dollar are shifting. Parity and above may in fact be the new normal.   

Finally what impact will a rising Australian dollar have on local shares? 

This is not an easy question to answer. The general economic conditions are buoyant in Australia, which is helping local companies remain profitable. However, a strong Australian dollar is bad news for Australian companies with earnings sourced overseas. Further a strong dollar is also a deterrent for overseas investors that will look to invest in countries with weaker currencies to get more value for their local money.     

Only time will tell as to what impact a high Australian dollar will have on local shares. We will be watching this space closely.  

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.