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Monday, November 1, 2010

What does a strong Aussie dollar means for you?

What a strong Aussie dollar means for you!

Last month the Australian dollar hit parity with the US dollar for the first time since it floated in 1983, prompting celebration around the country for holiday-makers and online consumers. But aside from parity parties and Aussie pride, what does a strong Aussie dollar mean for our economy, our industries and our investments?

Since January 2009 the Australian dollar has risen against most major currencies due to both the outperformance of our economy and our high official interest rates.

Having an interest rate higher than most other countries over the past two years has seen a lot of foreign investment pouring into Australia. This in turn has caused the Australian dollar to edge higher and higher against the greenback and other currencies.

Of course this is great news for those of you planning to take an overseas holiday during the Christmas period. The strong dollar will see you get a lot more bang for your buck in other countries.

It’s also pretty good news for consumers, especially those who are savvy online, as now is a great time to pick-up bargains on imported goods just in time for Christmas. But others aren’t so lucky.

When the dollar is strong our tourism industry at home suffers with most people booking holidays overseas where the Aussie dollar will go much further.

It’s also tough on companies that sell goods and services offshore as a high Australian dollar makes our exports more expensive.

Luckily, mining and energy are still in hot demand in China and India at the moment so many of our largest exporters should still be able fetch high prices. But other traditional sectors such as manufacturers and agriculture will definitely feel the pinch.

Worse still, if investment switches from these industries into the more lucrative mining and energy industries we run the risk of losing key skills and jobs in the Australian economy.

That’s why a strong Australian dollar often has a cooling effect on our economy.

The other area negatively affected by a strong dollar is global investments. Unfortunately, when the Australian dollar is rising, investments in global shares are lower in Australian dollar terms. This is why some investors prefer to invest in hedged products to help protect against changes in the Australian dollar.

Of course it’s important to remember the converse is also true – when the Australian dollar is lower, investments in global shares are higher in Australian dollar terms. So by hedging currency you may also decrease any upside in this scenario.

How a strong dollar affects your investment position will depend on the exact mix of investments across your whole portfolio.

If you’re concerned about how the rising Australian dollar is affecting your investments, the best thing to do is talk to your Financial Adviser. They can run you through what’s happening and help find the approach that suits you the best.

*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This editorial does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.