Dollar declines

There are plenty of entrepreneurs looking at the sharp drop in the Aussie dollar in recent weeks – this morning it hit an 11-month low of US95.63c – with much joy.

For the relatively small number of exporters on the Smart50 list the drop in the dollar could have put more than 10% back into profit margins, depending on whether or they have taken out hedging.

For retailers trying to compete with overseas websites that were flying when the Aussie dollar was sitting at $US1.10 the drop was also good news. The differences between local offerings and bargains from America, Europe and Asia have just narrowed considerably.

Many of the “structural changes” hitting our economy in the past few years have been caused by the stronger Australian dollar, which has changed cost structures in sectors from manufacturing and retail to financial services and technology.

In that context any drop in the dollar should provide some assistance or at the very least a breather for companies caught in the middle of that structural change.

But the drop in the dollar isn’t all good news.

For starters the latest drop is being caused by the escalating problems in Europe, where Greece looks headed for default and banks around the world look like being exposed. Throw in the parlous situation in the US and the chances of global recession remain high.

That’s seen markets move away from risk assets like the Australian dollar, so while a falling dollar might be helpful for exporters, the prospect of a weaker global economy certainly isn’t.

The other issue is that the dollar’s fall may be relatively short-lived.

While the currency will likely be under pressure until the picture in Europe starts to become clearer, strong commodity prices will probably push the dollar higher next year.

For example the Commonwealth Bank’s strategists expect the Aussie to end 2011 at $US1.04 cents and to end 2012 at $US1.08.

In other words SMEs exposed to the dollar should still be betting on the fact that it will be stronger for longer. That current dip appears to be a brief respite – and one caused by some pretty ugly scenes abroad.