Aussie dollar falls dangerously low as US interest rates rise

There's one big reason that the Australian dollar is so weak against the US dollar – but it could mean an investing opportunity for the brave.

ANALYSIS

The Australian dollar is in a capitulation trajectory, flirting with falling under 60 us cents. Here’s why, what it means and how to protect yourself.

American strength

The big reason our dollar is performing so badly against the US dollar is not any peculiar Australian weakness. Instead, the American economy is a juggernaut. Despite US fed rate hikes designed to crush inflation, the US employment situation is strong. Their economy added 336,000 jobs in just one month in September. Those are big numbers even for an economy as big as America. Their unemployment rate is fractionally above ours, at 3.8 per cent, but certainly not high.

What that means is investors reckon the US interest rate will stay high for a long time, and might even need to rise further. Interest rates of all kinds are rising in America, from home loans to credit cards and especially the interest rates on US government debt.

The interest rate on US government debt is probably the most important rate in the whole global economy. What I’m talking about is the yield on US treasuries and it is rising really strongly. That’s a major issue to pay attention to because high US yields haven’t been seen for a long time and can really change the global economy, making investors impatient and changing global capital flows. The Aussie dollar is casualty of high US yields at the moment, especially since US yields are even higher than Australian ones.

Chinese weakness is another reason our dollar is not shining brightly. The Chinese economy is looking more wobbly than it has in decades. And we are dependent on them. If China goes from wobbling to stumbling, expect our dollar to slump even more.

How to invest

If you’re weighing up buying stocks and you’re worried about a weaker Aussie dollar, buying US stocks might make sense. Here’s how it works.

You pay A$100 for a stock of a US company worth US$63.60. If the stock price doesn’t change but our currency falls, your investment can still go up in Aussie dollar terms. Imagine after a year the stock is still trading at US$63.60, but our dollar has fallen to 59 US cents. If you sell the stock you get US$63.60 but that’s now worth more than $A100. When you trade back into Aussie dollars, you now have $107.79. Minus any transaction fees, of course.

Investing in Bitcoin is another interesting example. IN USD terms, Bitcoin is rising. It’s up 72 per cent this year. But in AUD terms it is up 84 per cent.

Is now the time to invest in the US dollar or Bitcoin? Picture: Valeria Mongelli / AFP

The same reason applies; investing in offshore assets can reap you extra returns when the AUD is weakening. Just owning US dollars can have the same effect.

Of course, this is not investment advice, you could easily get burned if the dollar goes the other way. While there appear to be reasons for the AUD to extend its slide, remember that it is closer to the bottom end of the long run range. Across the last 40 years the average value of the Aussie dollar is closer to 75 US cents.

Winners and losers

If you’re in the job market, having half an eye on the exchange rate is not a bad idea.

If you’re joining an exporting business, you’re probably going to enjoy a low Aussie dollar more. If you’re in an importing business, you’ll enjoy it less. If your job involves buying things from America and selling them to Australians, your margins are getting squeezed. Those huge Chevrolet trucks, for example: their USD price is constant but their Aussie dollar price rises when our dollar falls.

But if your job involves selling Aussie things to Americans, your life is a bit better. Qantas is probably finding it easier to sell tickets LAX to SYD than it used to, because an Aussie holiday is looking cheaper for Americans than it did. Of course, the planes might be a bit empty on the way over there – travel to America looks pretty painful when our dollar is so weak.

Likewise our big exporters, the miners, are having a good time. They sell coal and gas in US dollar prices, but the share price and local dividends are measured in Aussie dollars and so are ages. In general a falling dollar creates better times for their shareholders and workers.

If you think the dollar will continue its slide under 60 US cents, then owning US stocks and working for an exporter could protect you from the worst of it – and if China’s wobbles turn into stumbles and then a collapse, the worst of it could be very bad indeed.

Originally published as Aussie dollar falls dangerously low as US interest rates rise