The drama of the dropping dollar

A falling dollar is a mixed blessing for small business. Photo: Jessica ShapiroThe Australian dollar has lost ground against the US dollar in recent weeks – a situation likely to be welcomed by the manufacturing, tourism and education sectors, as these are the industries that tend to struggle to be profitable when the dollar is at levels above parity.

The weakening dollar will also boost income and increase the competitiveness of exporters and help local businesses and industries that compete with importers as the price of imports rise.

Dun & Bradstreet spokeswoman Danielle Woods said the strength of the dollar through 2012 and early 2013 diminished the profitability of many businesses forced to compete on price.

“Following the recent fall in the currency, we’ve seen a swing in the outlook of a number of industries as they experience somewhat of a rebalancing of the playing field with international competitors,” she said.

“Unsurprisingly, retailers and manufacturers are now telling us they expect less negative impact from the current level of the dollar compared to earlier in the year. We’d expect companies in the agriculture and tourism sectors would also be relieved to see the currency slide.”

She said there was always a downside for someone when a currency moves. “In Australia, the small importing operations that were benefiting from greater purchasing power earlier this year will be less enthusiastic about the dollar’s recent fall.”

Australia Chamber of Commerce and Industry chief economist Greg Evans said the recent depreciation in the dollar had slightly improved the outlook for small business operators in typically trade-exposed areas such as manufacturing, tourism and education services.

“However, these influences will take some time to wash through and many in the industry will be hoping for a steeper and more sustained decline in the dollar to fundamentally change trading conditions – yet this is no sure thing,” he said.

“We have had a floating exchange rate for several decades and business has come to accept volatility. It just places greater pressure on all other areas of policy to ensure costs and taxes are kept low.”

Evans said that for a trade-exposed business, a lower dollar relative to Australia’s trading partners provided a competitive advantage, but business models that can survive an elevated exchange rate should be put in place.

“Over the medium to longer term that means manufacturers will have to shift to higher value-add production, where, for example, there is a greater application of research and development. But clearly that does not offer any short-term relief.

“There is always a flip-side to currency movements and that goes for business as well. Import-reliant businesses are already seeing some disadvantages and cost pressures with the dollar’s fall, as are businesses buying large capital items from overseas. A sustained fall in the currency may also add to inflationary pressures with potential increases in areas such as fuel prices.”

Dun & Bradstreet’s latest Business Expectations Survey found 58 per cent of business executives expected no impact on their third-quarter operations from the level of the dollar.

When asked what would influence their operations the most, 24 per cent said cash flow and 23 per cent said interest rates. Nineteen per cent identified the high Australian dollar.

Commonwealth Bank foreign exchange economist Chris Tennent-Brown said past surveys showed that movements in the Australian dollar clearly had an impact on businesses’ investment decisions.

“I think what is important is an awareness of how much the dollar can move,” he says. “Once you put this situation into context then you can evaluate it. You may perhaps then view a dip as an advantage and capitalise on it.”

He adds that big movements in the dollar are becoming more typical. “To some, these big movements appear to be a surprise, but moving several cents at a time is becoming normal,” he says. “Once you understand this you can manage your risk more effectively.”

The original release of this article first appeared on the website of Hangzhou Night Net.