The Australian dollar has just broken a 2-year high, and is still trading above 74 US cents today. Here’s why, and what it means.
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The Australian dollar has just hit a new 2-year high.
Yes, our national currency hit a new high overnight. According to reporting in the Australian Financial Review (AFR) this morning, the dollar hit a high of 74.53 US cents last night, which is reportedly its highest level since August 2018 – more than 2 years ago. The dollar has pulled back somewhat since, and is trading at 74.17 US cents at the time of writing.
Why the dollar is on the rise
So why is our dollar pushing these new highs? It’s likely that a significant factor is the rising prices of commodities that we have witnessed over the past month. As I’m sure most readers would be aware, mining and processing of commodities like iron ore, gold, oil and coal form a large component of the Australian economy. And over the past month alone, we have seen iron ore go from under US$120 per tonne to today’s price of more than US$145 per tonne.
Likewise, Brent crude oil has appreciated from just under US$38 per barrel a month ago to today’s price of US$49.25. And since 30 November, gold has risen from ~US$1,770 per ounce to today’s price of US$1,865.50 per ounce.
Because Australia exports large volumes of these commodities (particularly iron ore), rising prices mean overseas buyers have to exchange more US dollars for Australian dollars, increasing the demand for Aussie dollars. This, under the laws of supply and demand, has the effect of pushing our dollar up in response.
So is the Aussie dollar going to continue to climb and make new highs? Are we heading back, perhaps, to the days of parity with the greenback?
Well, the AFR quotes currency strategists from National Australia Bank Ltd (ASX: NAB) on that matter:
Markets remain in consolidation mode as we await Brexit and US stimulus developments… After no breakthrough, PM Johnson and the EU Commission President will now meet in person in coming days, so hopes for an EU-UK trade deal survive another day. Meanwhile US Congress bipartisan negotiators are still ongoing on a $908 billion pandemic relief package.
So, that’s a ‘not anytime soon’ from NAB, it seems.
What does this mean for ASX shares?
As I discussed a fortnight ago, a higher dollar is, in simplistic terms, good news for companies that import goods and services, and bad news for those that export. Thus, companies like JB Hi-Fi Limited (ASX: JBH), Bapcor Ltd (ASX: BAP) and Harvey Norman Holdings Limited (ASX: HVN) are probably cheering this development, as it allows them to import TVs, car parts and computers at a lower cost.
But for miners like BHP Group Ltd (ASX: BHP) and Newcrest Mining Ltd (ASX: NCM), as well as any other company that sends products overseas, the news isn’t so sweet (although the miners do have high commodity prices to help ease the pain).
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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited and Newcrest Mining Limited. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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