What do you mean “the dollar is going up/down?”
The Aussie dollar, and the rest of ‘the Majors’ all trade against the US dollar. Why is this? It dates back to World War II, and something called the Bretton Woods agreement. After the war, the US was the only major country to pull through with a relatively strong economy. Because of this, the US dollar was selected through the Bretton Woods agreement to be the world’s reserve currency, and the current system of setting exchange rates against the dollar was enacted. These agreements have been altered and revisited throughout the years since, but for the sake of understanding how the dollar fluctuates, we’ll leave it at that for now.
When the dollar goes up or down, that’s comparing its value against US dollar. So for example, at the time of writing, the Australian dollar is valued at $0.74. That means that for every Aussie dollar we have, it’s only worth 74 US cents. On the flip side, for every American dollar you have, it’s worth $1.34 Australian.
So, why does this matter if you’re not a stock exchange regular or travelling overseas? There are a few ways it can affect you, and you might not even realise that they are.
Imports and exports
This is actually a positive side effect of the dollar’s value declining. Let’s put this into an easy to understand example. Let’s say Australia is exporting wool to the US at the rate of $100 for 50 kilos, and the exchange rate is $1/$1. Great price for wool, right? But then something happens, and the Aussie dollar drops to $0.75 to every US dollar. Even better! The US can now import our wool for even lower prices, which causes a rise in demand. However, the opposite can happen if the Aussie dollar rises. Cost for importing our goods rises with it, and demand goes down as the US decides to see if they can get their wool cheaper from someone else.
If you’re anything like me (or 65% of my coworkers) you know your way around an online store. How often do you buy from overseas shops? Well, in doing that, you’re converting your hard earned Australian dollars into US (or another) currency, which basically means that jumper that seems like such a good deal actually might not be.
The other side of the dollar falling is that it affects our hometown retailers. In order to continue their revenue streams and make sure their businesses aren’t heavily affected, many retailers will raise their prices when the dollar drops. Unfortunately, the opposite cannot be said when the dollar rises, as businesses aren’t inclined to cut prices when the economy is good.
On a positive note, if you have personal investments overseas, the dollar decreasing is good news for you. When you go to cash in on your investments, you’ll convert the funds into Aussie dollars and reap the rewards!
There are a lot of things that impact the value of the dollar, but this will give you a general idea of what all the hullaballoo is about when you hear it on the news. There are many ways to benefit from a lower Aussie dollar – for some tips on doing so, have a chat with your local mortgage broker. They’ll be able to advise you on property investments as well as put you in touch with a financial planner if need be.