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Aussie dollar on the nose

Broadly speaking, two things have been responsible for the change in fortune of the Australian dollar.

China’s new leadership team has decided that 7.5% is a more sustainable rate of economic growth which has slowed demand for Australia’s iron ore and metallurgical coal needed to make crude steel.

Second, the US Federal Reserve is beginning to see enough evidence that the US economy is recovering, giving the central bank some leeway to slow down its stimulus program.

Both factors have coincided to rein in the unusually high level of the Australian dollar which has been wildly popular with global investors due to our relatively high interest rates and a range of stocks offering Mt Everest-sized dividend yields.

The US, Europe and belatedly Japan have all undertaken substantial monetary policy easing to stimulate their respective economies. The direct effect of that action was to lower the value of their currencies. As Australia has largely avoided the need for such action, the value of the Australian dollar has remained high in comparison with other currencies.

The Reserve Bank of Australia has regularly noted that the Aussie dollar was higher than it probably should be but has been reluctant to take any direct action to relieve the pressure. Fortunately, it appears the market is now doing the necessary adjusting to bring some much appreciated currency rain for exporters who need a lower dollar to grow their earnings.

Companies that generate most of their earnings overseas will also receive some benefit from the lower Aussie dollar as the translation of overseas profits into Australian dollars boosts the bottom line.

Like all things to do with the economy, there are two sides to the story. Importers will face higher prices and while consumers continue to have short arms in deep pockets, profit margins at retailers will get squeezed.

The Australian dollar has been at or above parity with the US dollar since late 2010 after sinking to around 65 cents during the height of the GFC in early 2009. The consensus view suggests the Aussie dollar will head towards 90 cents against the US dollar by the end of the year.

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