What the US dollar means to Australian companies

July 19th, 2008 Posted in Management, economy

Like most Australian business people I keep a close watch on the A$ - US$ exchange rate.

We’ve seen the American dollar take a beating in foreign exchange markets around the world so how does this work to the benefit of Australian businesses – especially those doing business in the US?

First let’s look at the local benefits.

The Price of Commodities

The cost of raw materials is measured in US dollars. The cost of a barrel of oil, for example, is measured in US dollars. So, as the dollar shrinks in value, the cost of those raw materials – everything from pork bellies to petrol will continue to increase in price.

Small companies that rely on raw materials can expect to see higher prices, not simply because of rising demand (the increase in the price of a barrel of oil is not driven by supply and demand – demand for oil in the US has dropped in recent months), but expect to see the cost of goods increase as the dollar continues to weaken against most foreign currencies, including our own dollar.

The Cost of Doing Business With US Companies

Our Australian dollars grow in value against the US dollar so we get a bigger bang for our buck when converting Australian into US dollars. However, what happens if the Federal Reserve Bank moves in to shore up the US dollar? Will that help the Australian economy? Not in the least. Take a look at the US stock market reaction to the Fed propping up Freddie and Fannie (Mac, that is).

Buying US Debt

Wars in Iraq and Afghanistan, the mortgage meltdown and the uncertainty of who the next US president will be (the race between Obama and McCain is still too close to call) have all taken down the US dollar.

Consider the Euro – one of the most important currencies on the world market. On July 11, 2008, 0.62901 € bought $1.00 USD. No wonder Europeans are flocking to the US this year. It’s almost a bargain. But before you fly off to LA for a little shopping spree, expect to see changes in the coming months.

Ben Bernanke, Fed Chair, has already indicated that rate cuts for the US dollar are in stalled mode and the bank buzz is that the Fed is actually planning to raise interest rates. This, will of course, prop up the dollar’s value by making borrowing more expensive. But it’s going to have a negative effect on American consumers with adjustable rate mortgages and credit cards. US dollars become more expensive, Americans spend less. Want proof?

Petrol consumption in the US dropped 11% since the price per gallon topped US$4.00. So, as money becomes more expensive, Americans spend less on non-essentials, and that’s NOT good for Australian businesses that export goods and services to the States.

And, as the world economy sees the US take action (as politically painful as it will most certainly be for the next US president) to prop up the American dollar, we should see commodities actually drop in price – deflation at the expense of the American consumer.

Your Bottom Line

If you’re an Australian business owner, this is one of those good news-bad news scenarios. If your business base is almost exclusively Australian, you’ll see improved margins as commodity prices stabilize with the stronger dollar. Of course, this assumes your business purchases raw materials on world exchanges.

On the other hand, if you export services or goods to US consumers, expect to see a pullback in consumer spending in the US. Heating oil prices in the US have almost doubled and Americans will be spending whatever earnings they bring in on heating their homes, driving to work and putting food on the table.

This week’s rise in the US stock market doesn’t hide the fact that the US is in what prognosticators call a “technical recession.” I wonder how American homeowners facing foreclosure feel.

It’s not a technical recession when you’re about to lose your home.