Exchange Rates are Falling. Is that good or bad?
You may have seen recently that the Aussie Dollar has fallen when measured against the US dollar. At first glance, most people think this is a bad thing. Happily, the reality is not quite so alarming.
You may have seen recently that the Aussie Dollar has fallen when measured against the US dollar. At first glance, most people think this is a bad thing. Happily, the reality need not be quite so alarming.
First, here is what has happened to the Aussie dollar/US dollar ($AUD/$US) exchange rate over the last six months, thanks to Google:
Ignore the spike right towards the end. The key thing to note is that the value of the $AUD is currently at its lowest point for the past six months. The rate is 0.6263. This means that, in foreign exchange transactions, one Australian dollar will buy you 62.63 US cents. Six months ago, the same Aussie dollar would buy you more than 74 US cents. Put the other way around, if you wanted to buy $US1,000 six months ago, it would have cost you $AUD1,351. Now, it will cost you $1,596. That is bad news if you need to buy something using US dollars. For example, if you are planning a trip to the States any time soon, that trip just got 16% more expensive.
But there is always another side to the story. If you sell things that people with US Dollars want to buy, then those things have become a lot cheaper for your buyers. Let’s say you are a tourism operator selling tours for $AUD1,000. Six months ago, an American tourist would have to pay $US740 to buy your tour. Now, they only have to pay $US626. That should encourage more people to buy your tours.
You might even pick up some more sales from Aussies who decide they can’t afford to head to the US.
When we expand this out, and speak more technically, we see that the change in the exchange rate between Australian and US dollars has made Australian imports from the US more expensive and Australian exports to the US cheaper. If the market works the way it should, this should reduce the amount we import and increase the amount we export to the US.
That is, the fall in the exchange rate is actually good news for people who export, such as tourism operators, education providers, mineral exporters, food exporters, etc. Anyone who generates income from US buyers should see sales increase when the $US exchange rates fall.
A great example of the benefit of a low Aussie dollar is the way Hollywood movies are increasingly made in Australia. You may remember, back when the pandemic started, that Tom Hanks and his wife Rita Wilson both tested positive to Covid while they were in Queensland. You may not remember that they were making a movie – Baz Luhrmann’s Elvis movie – while they were there. If you look closely at the movie, you see that it is full of Aussie actors – Elvis’ wife Priscilla and both of his parents are played by Aussies, just for a start.
It is estimated that filming the movie on the Gold Coast was worth more than $100 million to the local economy. Hollywood movies are funded with $US, so a lower $A will encourage more movies like this to be made.
So, the next time that people tell you that the sky is falling along with the Aussie dollar, think twice. There are always two sides to an exchange rate story.
