Dollar Goes Bungee Jumping. Why Should You Care?

The Aussie dollar’s shedding value like a new car, and by all accounts looks set to set to continue its descent as the US bounds out of its economic lull.

You’ve probably noticed this has got a lot of commentators and experts up and about in the media, with everyone weighing in on what the dropping dollar means for our economy.

So, what’s all the hoo-ha about?

Why is it falling?

For starters, everyone’s worried about the Chinese economy and whether they can sustain their insatiable appetite for the resources we’re digging up. But the big one rattling the currency at the moment is the increased likelihood of the US Fed – the equivalent of the RBA here – increasing interest rates.

One of the key drivers of the Aussie dollar’s strength over the past few years has been our relatively high interest rates, which have enticed investors to park their money here to earn a safe return.

So, as interest rates lift in the States, it’ll be less attractive to hold Aussie dollars and money will flow back out. The fewer people buying Aussie dollars, the more that are available for everyone else and the less people will pay for them.

Like everything else, ever, it’s about supply and demand.

That’s the gist of it.

What does it mean?

Well, it increases the cost of imports, so local goods become relatively cheaper. This is good for Australian made stuff, but bad news if you buy a lot of your music, clothes, books or furniture from aboard. These things will need more of your precious Aussie dollars to purchase.

Local travel also becomes more attractive, but only because it’s now more expensive to go overseas. The cost of travelling within Australia won’t get any cheaper. In fact, if there’s a big swell of holidaymakers staying at home, prices could be driven up.

Supply and demand again, y’know?

The big winners are businesses with international customers, as their stuff is now cheaper to buy if priced in Aussie dollars.

If products are priced in US dollars, like most natural resources for example, Australian businesses selling these products will convert the US dollars they receive into more local cash. Winning.

AUD

Chart: Yahoo!7 Finance. Silliness: The Hip Pocket

On the back of that simple equation, exporters, education providers, manufacturers with international exposure and tourism operators generally do well out of the falling currency. As do our miners and consequently the government wallet.

And you benefit from this too, in a roundabout way. Local businesses making more money invest and employ more people and these investments and people put money into other people’s hands. This goes on and on.

It’s called a multiplier effect and is why one new dollar created in an economy is worth much more than one dollar. This leads to more jobs, generally spurs wage growth and gives the government more money to splash on swish new roads and all those sweet things you probably take for granted.

So it’s a bit of a mixed bag, but overall a lower dollar is thought to be good to drive more spending on Aussie goods and services and overall economic growth.

Any questions? Cos we love talking about this stuff.

Image courtesy eliza mougel, via Flickr