All of a sudden the media is focussing on the slump of the Aussie dollar that has actually been going on for some time. The Daily Tele’s John Rolfe has told us that the greenback has been surging and our little Aussie bleeder has been haemorrhaging, dropping 19% in six months, making a holiday in the US very expensive. But why is the ‘world’ dumping the dollar? Try these developments:

1. US interest rates are rising faster than our rates.
2. Commodity prices are now falling.
3. A worry about recession means a slower world economy and we’re a big export nation. When we sell ‘stuff’ to overseas customers, they indirectly increase the demand for Aussie dollars and up goes the exchange rate.
4. Global economic fears also make the US dollar more attractive and big US companies often repatriate money back home from overseas.
5. China’s slowdown and its anti-Oz stance doesn’t help the $A either.

So what are the effects of this weaker dollar against the greenback and also many Asian currencies?

It’s bad for importers but great for exporters, and it will help overseas tourists come to Australia. It’s bad for inflation as imported ‘stuff’ is more expensive and this winds its way into the Consumer Price Index (CPI). This could put pressure on the RBA to go back to 0.5% interest rate rises.

If you’re invested in overseas companies, the value of the returns increases in Aussie dollar terms. That can help the stock prices of those sorts of companies. A good question is when will the dollar recover, at least to the average price against the US dollar?

This chart shows how after a big fall there’s usually a big rebound.

Aussie $/US$

This dollar dive isn’t helping local inflation but if US inflation starts to fall, I bet stock prices will rebound, global economic outlooks will pick up and the Oz dollar will start climbing off the floor after its recent belting. In a story I wrote for The Switzer Report yesterday, I showed how international prices that feed into inflation are on the slide.
Check these moves on prices out:

1. The Baltic Dry Index, a gauge of maritime freight rates, is down 36.3% from this May’s supply-chain-suffocated high.
2. Oil in US dollars is down 29.5% from its June high.
3. In America, wheat is down 36.8% from March highs.
4. The UN’s World Food Price Index has fallen for six straight months, currently 14.7% below its March high.
5. US home price gains peaked in March, slowing sharply since as homes are taking longer to sell. Home prices routinely lead rents.
6. The S&P Global price survey for manufacturing has shown input prices at a 19-month low.
7. Shanghai Freight rates are down 62.4% since January.

Eventually (hopefully in November or December), US inflation will show the effects of these lower prices and it will make market influencers think that interest rate rises are close to ending. That will be great for stocks and the Aussie dollar.

By the way, the big question is: Where can you go overseas if you need to fly? Well, Japan looks good as the Aussie dollar is up 16% against the yen since December. It has also gained 9% against the New Zealand dollar and 10% against the British pound. But probably the cheapest fly-to-holiday is interstate and that will be good for the economy and the local dollar because when we go overseas we demand foreign currency and effectively dump the little Aussie bleeder!