The Australian dollar has risen above US 77 cents following the release of the US Federal Reserve's May meeting minutes which provided no clear indication of when it might start raising interest rates. As at 11:08am (Sydney time), the dollar was fetching US 77.2 cents.
Earlier in the year, the markets believed that the Fed would begin the process of rates normalisation in June, although doubt was recently cast on that assumption based on slowing growth.
In the minutes from its most recent meeting however, some board members argued increases would begin in June while "a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016."
At the same time, the Reserve Bank of Australia surprised local markets when it elected to leave interest rates unchanged at its meeting earlier in the week. The market had been expecting rates to be slashed by 25 basis points to a record low 2 per cent, but the RBA hesitated, largely due to concerns over Australia's inflated property market.
The Reserve Bank has long been targeting an exchange rate of US 75 cents to enable the economy to rebalance, and to help offset some of the impact of falling commodity prices (which are quoted in US dollars). Although the dollar has rebounded above that target level, the recovery could well be short lived.
The fact is, the Australian economy is showing strong signs of weakness, highlighted by our 6.3 per cent unemployment rate, falling capital expenditure, low consumer confidence and tumbling commodity prices. Iron ore, for instance, is trading at around US$48 a tonne according to the Metal Bulletin, near its lowest price in a decade.
How YOU can profit
There are a number of ways that Australian investors can benefit from a weakening dollar. While the most obvious way would be to invest offshore – particularly in the US market – many investors are more comfortable keeping their capital invested locally. A great alternative is to invest in Australian companies which have strong exposure to international markets, whereby a weaker exchange rate boosts their earnings in Australian dollar terms.
There are a multitude of companies that investors could choose from, but today companies such as QBE Insurance Group Ltd (ASX: QBE), Computershare Limited (ASX: CPU) and Westfield Corp Ltd (ASX: WFD) are looking particularly compelling.
Meanwhile, if the Reserve Bank does reduce interest rates in May as it is expected to, Australia's high-yield dividend stocks are also likely to be huge beneficiaries. The Motley Fool has just named three of its best dividend picks for 2015 which could be well worth your attention today!
