It has been yet another positive day for the Australian dollar. On Friday afternoon the local currency rose to 81.2 U.S. cents, its highest level in over two years.
This has brought the currency's year-to-date gain versus the U.S. dollar to over 13%.
Where next for the Australian dollar?
Whilst a portion of the Australian dollar's gain this year can be attributed to rising commodity prices, the majority of its gain stems from weakness in the U.S. dollar.
One need only look at the U.S. dollar index to see how much the greenback has weakened this year. The index, which measures the value of the U.S. dollar against a basket of currencies, has fallen over 11% since the start of the year.
This decline is all the more surprising considering that the Federal Reserve has raised rates in the U.S. twice this year.
According to the Financial Times, the weakness is related to political turmoil surrounding the Trump administration and the lack of fiscal stimulus out of Washington.
Unfortunately for the Reserve Bank and Australian exporters such as Treasury Wine Estates Ltd (ASX: TWE) and Graincorp Ltd (ASX: GNC), it is hard to see the political turmoil in Washington going away any time soon.
Likewise, it seems unlikely that President Trump will be able to push through any form of stimulus as previously promised.
In my opinion, this could mean further weakness in the U.S. dollar and strengthening of the Australian dollar over the coming months.
Which could be a major headwind in FY 2018 for companies that generate a significant portion of their revenue in U.S. dollars.
On the contrary, it could be good news for companies such as Nick Scali Limited (ASX: NCK) and Reject Shop Ltd (ASX: TRS) which pay for imported goods in U.S. dollars.
