Is a weak dollar a bad or a good thing?

Thursday, Feb 5, 2015

Taking a longer-term view of the value of the Australian dollar can be a pain in the neck — literally, if you focus on every single rise and fall, and rise, and fall (and so on).

The Aussie dollar has traditionally taken the role of slightly-poorer cousin to the US dollar, and until 2010 the last time the Australian dollar was equal pegged with its US counterpart was on July 28, 1982, when the Reserve Bank, not market forces, was controlling its value. Not long after (December 1983) the dollar was floated, and it wasn’t until October 15, 2010, as a freely trading currency, that the $A reached parity with the greenback.

Since then, our currency has tracked up and down, and even sustained a value higher than the $US for a time, but the recent trend seems to hark back to its earlier position. At present, our dollar is about 30% down from its 2014 high.

But should this be viewed with any sense of loss of national pride or prowess? And keep in mind that the status of our currency may have more to do with relative value than true value, as we could equally ask is the $A weak or the $US strong?

However it is the flow-on effects of dollar value that matter, and that will be felt by Australians — and the impact can be different for everyone.

The lower Australian dollar will be felt by consumers buying durables such as flat-screen televisions, whitegoods and so on — goods that may not have domestically produced substitutes. Imports account for around 30% of consumption goods, and includes cars, clothing and many electrical items. Many businesses that source inputs from overseas will of course feel the heat to push up prices as well.

The effect on online retail is another thing. Australian consumers’ propensity to purchase overseas goods online may well diminish dramatically with the weakening of the $A. Research has shown that the most popular items for online shopping are clothes, shoes and toys. The online penetration in these categories is much higher than average, however the online buying option for bulkier items such as mentioned above is less of an issue.

Anyone who had been thinking about heading overseas for a holiday will undoubtedly be re-thinking travel plans, with local destinations perhaps making better fiscal sense. Importers and consumers who buy goods from overseas may also be feeling the pinch. But anyone relying on export markets could have a rosier view, and this includes several areas of manufacturing, agricultural and rural producers and the tourism industry — with overseas buyers now likely to look at the “cheaper” Australian suppliers.

And these are the very industries that are for the most part dominated by smaller enterprises. People making a living from these sectors, or even working to supply services or products to them, would be watching the dollar's drift lower with a bit more hope than when our dollar was valued above the greenback.

Tourism in particular is made up of a lot of smaller suppliers, encompassing all manner of offerings such as transport services, accommodation, car hire and tour operators. Then there are related areas – catering, recreational equipment hire (bikes, windsurfers, canoes), and even local arts and crafts.

A lower local currency means Australia is more likely to be a choice destination for overseas visitors, and for industries here this trend is also fed by the fact that our own holidaymakers will be more attracted to staying put – and keeping their spending local as well. The considerable British and

European backpacker brigade is also expected to re-kindle an interest in trekking Down Under, for example, but this can also be attributed to economic factors in their home country.

Exporters of course become much more competitive, but so do those smaller manufacturing firms that compete with overseas producers. The education industry, which is worth millions, becomes much more attractive for foreign students coming here, which has a flow-on effect for local accommodation providing businesses.

So is a lower valued dollar a bad or a good thing for Australians?

For one thing, we are perhaps fortunate that concurrently with the dollar's slide is also dampened fuel prices. Otherwise, as with many economic influences, it all depends upon your circumstances. Currency fluctuation is just another factor of the financial landscape, with more important “hands-on” type issues being what you do for an income, who you compete with, and of course maximising tax efficiency.