What a booming Australian dollar means for you : make education too costly for overseas student

What a booming Australian dollar means for you | News.com.au

ECONOMISTS reckon it's better to have a strong currency than a weak one, because a strong dollar is generally a sign of a buoyant economy.

And it's pretty clear that Australia is the envy of the developed world when it comes to the way we escaped the full force of the global financial crisis.

But although we're not suffering to the same extent as the US, Britain or even Europe, the benefits of a surging dollar aren't always that clear-cut.

While it is good for Aussies travelling abroad, for instance, it is a kick in the guts for many companies trying to sell Australian goods overseas.

This is because our products are more expensive to foreign buyers.

If you're a farmer, a winemaker, or even working in our huge education sector, you're facing a tough time, because the 52 per cent rise in the Aussie dollar since October 2008 translates to a crushing price hike for customers paying with US dollars.

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Even for Asian investors, the rise will have made an Australian education too costly for many.

"Our education system has grown enormously, thanks in a large part to attracting foreign students to study in Australia," AMP Capital Investors chief economist Shane Oliver says.

"The danger is now that with a stronger currency those students think they may as well go and study in the US or Europe. There's a real risk of our universities getting priced out of the international market."

Tourism

Travellers heading offshore are enjoying a buying power boost, but the strong dollar is bad news for Australia's domestic tourism industry. More people go abroad to capitalise on the strong dollar, while fewer people visit Australia because of the higher costs.

Overall, foreign visitors to Australia have fallen by 2 per cent in the past year, costing our tourism industry millions of dollars in lost revenue.

According to the Tourism and Transport Forum, Australia has traditionally had hundreds of thousands more tourists visiting Australia than residents travelling overseas. But that trend has recently that has reversed.

"It's impossible to say whether Australians have substituted foreign holidays for domestic travel," TTF executive director Brett Gale says.

"They may be doing both. We did a survey three months ago which shows that sentiment has improved over the past nine months along with the improving global economy, but the mood is certainly not exuberant."

Domestic manufacturers that compete with imported goods also have a tough time, because a strong dollar means our money goes further, cutting the cost of imports and making them cheaper than locally made goods.

That's precisely why Pacific Brands decided to move its manufacturing overseas.

Consumers

Economists who reckon a strong dollar is good for consumers because the price of imported goods tends to fall may need to update their research.

While their argument is right in theory, reality appears different.

JB Hi-Fi chief executive Richard Uechtritz says he makes no savings from a strong Aussie dollar, so there are no savings to be passed on to consumers.

"We buy our goods off the local subsidiaries here so they are the ones that are setting prices," he says. "We buy our goods in Aussie dollars and then put a mark-up on top of whatever price they sell to us."

A David Jones spokesman says that retailer operates in the same way. "We don't take any Aussie dollar risk or benefit," he says.

"We buy and sell in Aussie dollars, and it's our suppliers who deal with the currency fluctuations. If we imported everything, you'd have the price of lipstick, or whatever, all over the place and consumers would be asking why.

"But we keep prices steady."

Investors

Whether or not a strong dollar is a good or bad thing for your investments depends on where your money is tied up.

If you invest in companies based here that make most of their money in Aussie dollars, the currency fluctuations are unlikely to make that much difference.

But if you have money invested overseas and through superannuation, most of us do then the impact of a rising dollar can all but wipe out the gains.

Similarly, if you invest in Australian-listed firms that have significant exposure to overseas markets, particularly the US, then it is a blow because the profits they make overseas will buy back fewer Aussie dollars.

RBS Morgans private client adviser Trent Muller says these companies have experienced a challenging time and investors have seen share prices take a hit, but he is advising clients to move money into these oversold stocks in preparation for the Aussie dollar weakening next year.

"We're looking at stocks including QBE, Resmed, CSL, Westfield and News Corp because they've been underperforming thanks largely to their exposure to the US," he says.

"But as the US Federal Reserve starts to talk about raising interest rates next year, the US dollar will strengthen against the Aussie dollar and that will boost returns from these stocks."

But Commonwealth Bank currency strategist Richard Grace says it may be too early to call the Aussie's demise just yet.

"We think it's going higher from here, and have forecast US98 by June 2010," he says.

"That's within a trading range of parity, and we're that bullish for three reasons: The relative health of the Australian economy, further improvements in the global economy, which will be good for commodity prices, and further depreciation in the US dollar."

Grace agrees the US dollar could start recovering as the US starts to talk about raising interest rates, but says that is unlikely until at least the second half of 2010.

"So if you're planning on visiting the US or UK next year, do it sooner rather than later."

Once the US dollar starts to strengthen, Grace says, the Aussie dollar could fall back to around US80. That's more in line with a longer-term average, and can allow our battered exporters time to recover.