It was only November 2010, when the Australian dollar was pushing parity with the US dollar that we marveled and wondered, how high can it go? Now deep into 2011 the rise, and rise, of the Australian dollar continues to make Australian headlines.

For most people the news of our currency increasing in value is welcome - as individuals, we in effect, feel empowered as we can afford to buy more, imported goods reduce in price, the overseas holiday within reach, and the bargains of online shopping irresistible.

However, a change in value of a currency, whether positive or negative, can impact on the way people view their investment portfolio, and the economy. What does the movement of the dollar mean for the economy and your investments moving forward?

The economy

There are always two sides to a coin, and the effect of a strong dollar is no different. In November, as part of the WHK SME Pulse Survey, small and medium businesses were asked if they thought a strong Australian dollar was good for their business - 27% said it would have a negative impact and 33% a positive, while 40% remained unsure.

For businesses operating in manufacturing, export and tourism, the strong currency makes their products and services more expensive to sell. For multinational corporations, converting overseas revenue back to Australian dollars, they lose value on exchange. While for other industries such as retailers and importers the increased buying power is great for their profitability and their customers.

Investments

In the short-term international investments appear attractive. Australian's can buy more shares in a US company per dollar than we could a year ago. And, assuming the investment was solid and performed well, any subsequent fall in the dollar value creates opportunity to sell and convert back to Australian dollars at a favorable rate. While this may sound great in theory, it may not be a suitable strategy for investment success - as opposite movements would multiply losses.

If you have available cash, then investing internationally could be an option. You will need to consider how much of your portfolio is already directed to overseas shares and property, especially via your superannuation fund. If there is funds available, then an increase in this allocation may make sense - however the percentage of your portfolio dedicated overseas needs to be carefully managed in line with the overall income and returns needed to save for your retirement, or for funding  your retirement pension.

Forecasting the future

It is extremely difficult to forecast international currency with confidence. The chart above shows the volatility of the Australian currency against the US dollar since its float. Over the long- term, the expected level of our currency will be closer to historic averages, in the low 80 cent range. For my clients, it is more important to take a long-term investor perspective, not to try and time the market, and that we don't panic and sell when times get tough. Our investment philosophy and strategic asset allocation are constructed to deliver the required return and income without taking on unnecessary risk   - and to never be forced sellers of growth assets.  

Chris White
Divisional Leader - Wealth Management

This information contained in this newsletter was compiled by WHK Pty Ltd ABN 84 006 466 351 (WHK) and WHK Financial Planning Pty Ltd ABN 51 060 092 631 (WHKFP). This is an information service only and is not financial advice. WHK and WHKFP do not provide any warranty regarding the accuracy and completeness of information in this newsletter. All material contained in this newsletter is based on opinions, conclusions and forecasts that are reasonably held at the time this newsletter was compiled. WHK and WHKFP assume no obligation to update the material to reflect any changes. WHK, WHKFP, their