Investing to the dollar

2 min read

Keeping an eye on the value of the Australian dollar has always been a sensible approach for travelers and it’s something investors should also keep in sight.

Anyone who invests in international assets, from shares to commodities, is exposed to foreign currencies, and feels the impact of how these are valued against the Australian dollar and against other assets. This can add or remove value from your portfolio depending on market activity.

The value of a dollar

The Australian dollar can be influenced by:

  • inflation
  • commodity price levels
  • financial market sentiment
  • volatility in asset markets
  • global investment flows
  • movements in interest rates
  • investor speculation.

All these factors work together to determine a price for the Australian dollar, which sees it fluctuate against other world currencies.

High or low

Australia’s economy typically benefits from a lower Australian dollar compared to the US dollar (though online shoppers may dispute this). A lower Australian dollar assists in supporting our export markets as countries can purchase more for a lower cost, and can offer a welcome boost to tourism as a traveller’s spending budget extends further.

Currency and the value of international investments

When making overseas investments, there are two approaches.

  1. Invest wholly into the investment, for example, 100% into international shares.
  2. Invest into a hedged investment which means that a portion of your investment is allocated specifically to manage the risks that the currency of the investment decreases against your own currency.

Investors generally select an option based on their view of whether the Australian dollar is likely to increase or decrease.

For example, if you think the Australian dollar is going to decrease, you may choose the first option, to be completely invested. This would mean that, assuming consistency in value of other global currencies, if you redeemed your investment you would hope to gain extra value from the currency conversion, aside from any growth in the investment.

If though, you thought the Australian dollar was going to increase, you may choose the second option. This would mean you are seeking to minimise value loss from the currency conversion.

Finding the right approach 

Which option is correct is not necessarily as simple as the direction of the Australian dollar given its relationship with other global currencies. Currency fluctuations can be short or long term depending on market activity and the domestic situation of a country. In some cases, investors might have a blend of both direct and hedged options to counter currency changes. The constant changes mean it can be difficult to manage currency in your investments and having expert advice or investment managers can be invaluable.

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This information is current as at 10 October 2017.
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