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That bloody dollar!

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by Peter Switzer

Two days in a row Wall Street has invited us to buy stocks and prosper and two days in a row our stock market refused to play ball. Again today, the Dow Jones index was up over 0.5 per cent and so the question is, will the exploding Aussie dollar dud stocks again?

Sure, there’s always more than one reason for stocks not living up to expectations but this rocketing Oz dollar — now in the 109-US cents region and heading to 110 US cents sooner rather than later — is hurting our stock prices.

Shane Oliver of AMP Capital Investors says the Oz dollar on steroids — my words not his — not only makes it more expensive for, say, US investors to buy our local shares, which is a turn off, the high dollar is hurting the profits of many dollar-sensitive stocks, such as those in tourism, education, exporting or competing against ever-cheapening imports as the dollar rises.

When will it stop?

But the question is, when will the dollar stop rising and will there be time for our stocks to play catch up?

You see, there’s a gap between rising company profits and what share prices should be and, of course, these prices are lagging behind. Now if the dollar fell to a sensible level like 92 cents where a number of major banks thought it would be by year’s end, well that would help our stocks make up some ground.

Bernanke effect

Yesterday’s Ben Bernanke press conference could have helped our case if the Fed chief had said the US economy is nailing it — growth is spot on, inflation is no threat and so we will raise rates some time this year — watch this space.

He did say that inflation isn’t a threat but he needs more growth and job creation. That has led many to say rates will remain on hold, which sunk the greenback and sent our dollar higher.

Of course, we’re lucky that China is buying lots of stuff from us as it helps our economic growth but it also pumps up our dollar too.

Dollar forecasts

In a perfect world for Aussie investors, we would want to see a slower China but still growing nicely and a stronger US economy without inflation but with higher interest rates. This would peg our dollar down a few notches and would help share prices. And if I could throw in peace in the oil countries that brings the petrol price down, then I would be in economist’s heaven!

Yesterday, one bank raised its forecasts on the Aussie dollar to 115 US cents but there are other forecasters saying it could even go higher!

One plus from something like this would be that the RBA wouldn’t have to raise interest rates as the rising dollar actually slows down the economy.

US data watch

So if the health of the US economy is critical, what’s the latest?

Well, it’s not great with the country’s GDP growing at an annual rate of only 1.8 per cent in the first quarter of 2011 compared with 3.1 per cent in the previous quarter. Now Bernanke says this will be temporary and reflects higher gas prices and the market believes him — that’s why the Russell 2000 Index of small caps is in record-high territory.

On the good news front, pending home sales contract signings rose 5.1 per cent and any good news for the housing sector has to be cheered but the Yanks need a lot more before this sector is out of the woods.

All up, there’s nothing I can see that can stop this bloody dollar going higher and impeding the progress of our stocks, and so we may as well go on holidays and enjoy it.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, April 29, 2011

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