Dollars and sense: the Aussie dollar in 2018

January 23, 2018

A rising dollar is good news for some sectors, while a fall is good for others.

Dollars and sense: the Aussie dollar in 2018.

Some pundits project the Australian dollar to appreciate in 2018 due to a climate of global economic growth, rising commodity prices and expectations of interest rate rises. Indeed, a survey by the ABC found that three out of nine Australian bank economists expect rates to rise.   

But an increasing number of economists, including the remaining six from the ABC survey, are predicting the dollar to fall during 2018, albeit only slightly. Here are some factors to consider if you’re investing overseas or planning international travel. 

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What makes the exchange rate move?

Since early 2016, the Australian dollar has been gradually (but erratically) appreciating against the US dollar. For BIS Oxford Economics associate director of economics Richard Robinson, the middle of 2018 will probably see the US dollar about 75 cents, and by the middle of 2019 it may get to around 72 or 73 cents.

However, Robinson also believes this will probably be about as low as it will go before it starts lifting again. “Probably late this decade or possibly in 2020 we think the RBA [Reserve Bank of Australia] will start to raise rates as the economy starts strengthening,” he says. “That also means Australia becomes more attractive as an investment destination and the exchange rate starts appreciating again.”

Independent economist and former Bank of America chief economist Saul Eslake agrees that that in 2018 the Australian dollar is more likely to depreciate for three reasons:

-The US dollar is likely to rise against most major currencies, as the United States Federal Reserve moves interest rates back up towards “normal” levels, fuelled by the impact of President Donald Trump’s fiscal stimulus and tax cuts.

-The Reserve Bank of Australia is likely to lag other central banks in raising interest rates, so interest rate spreads in favour of the Australian dollar will narrow further (and in the case of the US, they could turn negative for the first time since the early 2000s).

-Commodity prices are more likely to fall than rise, as Chinese demand moderates while supply increases a little further.

However, the exchange rate is also tipped to remain in relatively tight channels. Deloitte Access Economics partner David Rumbens says if global economic growth continues in a fairly strong fashion, a big currency move is unlikely.

What impact does the exchange rate have?

Rumbens says industries involved in exporting, such as manufacturing, tourism, education, mining and the agricultural sector, will benefit if the dollar falls – their products will become cheaper and hence more attractive. He says this can also have a beneficial impact on the federal budget, as it means greater income for the government.

“For those sectors that trade, as the dollar comes down, Australian goods and services become more competitive,” Rumbens says. “If profitability improves for Australian exporters of coal, iron ore and wool that means more income through taxation, which means an improvement for the federal budget.”

Robinson agrees that a lower Australian dollar will be good for the federal government’s bottom line. “The fall in the dollar is probably good overall for corporate profits and therefore taxes,” he says. “But some industries will be affected by higher costs and lower profits.”

While exporters will benefit from a lower dollar, on the flipside, the importing sector, including wholesalers and retailers, will find it tougher.

Costs become higher and businesses either have to pass this onto the consumer or absorb it themselves.

“Retail is a very competitive sector, and a lower dollar can have an impact on profit margins in those sectors,” Rumbens says. “But because the dollar won’t fall much, it probably won’t have a huge impact.”

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