Is the Australian Dollar in trouble? The answer is yes, but there are good reasons for investors to be bullish on the Australian Dollar, as the Australian dollar has been performing well against the US Dollar and other major currencies over the past few years.
People were concerned that the US Federal Reserve would increase interest rates to slow the economy down. The Federal Reserve actually did just that by raising interest rates from near zero to 0.75%.
Yet, the Dollar Index remained strong and continued to rise. Investors did panic as they were counting on the strengthening of the dollar to give them a price break on the currency markets. So, while it certainly affected some Australian stocks and shares, it did not seriously affect the fortunes of investors who have been using the Australian Dollar as a platform to increase their wealth.
But as you might expect, with the Dollar Stronger, the US Dollar will strengthen. And so it has. As it has turned out, this is very good news for the Australian Dollar.
There are many reasons for this. First, many commodity commodities that were purchased in dollars have increased in value as the dollar strengthened. This also appears to have put some of the fears of investors out of their minds.
Secondly, if it turns out that the US Dollar strengthens, as seems likely, it will open up the possibility of US Dollar denominated assets re-entering the Australian market, which will also provide opportunities for Australian companies to re-invest. It is also likely that the RBA will tighten its base money and this will encourage banks to lend more capital and will be a good thing for Australian investors.
As the world continues to recover, there are also many opportunities for Australia, both in terms of dollar strength and inflation levels. As we have seen recently, many nations have had a negative impact on the currency market due to currency devaluation, so there is little cause for worry.
If the Australian Dollar remains strong then this can only be a positive for investors as we move into the next decade. And that is precisely what should be expected, because currencies can be either strengthening or weakening based on the economic trends of major countries.
As the US Dollar weakens the Australian Dollar should strengthen to gain some advantage. Therefore, one might think, why would we be worried?
Well, that would be if the Federal Reserve decided to tighten its policy even further, and this might put us back in a deflationary cycle that can get us into a recession. But, there are signs that the US economy is rebounding as we speak and this is another reason why the Australian Dollar might fare better than other currencies that we trade with.
In addition, the Bank of Japan will cut interest rates this year and this will mean that more money will be injected into the economy, which will again result in more dollar strengthening. But, if the Federal Reserve does tighten up, then it could mean the end of the Dollar’s power.
The real question is whether the Fed is going to be forced to increase rates and, if so, when and how much and whether the other developed nations will follow suit. I believe the Fed will tighten up at some point and this means a dollar strengthening and this is the way to go if you want to build your wealth in the short term.
