One of the biggest surprises on financial markets over the past 2 weeks has been the surging Australian dollar. The Aussie dollar is today asking 73.52 US cents after going as high as 74.1 US cents earlier in the week.
It's been a remarkable 2 weeks for our national currency, which dipped as low as 71.3 US cents a fortnight ago. The Aussie is now more than 33% higher than the 55 US cents level it touched during the coronavirus-induced share market crash back in March.
The exchange rate is one of the largest single influencers of national economic activity, so with such a strong rise in the dollar, what does this mean for ASX shares?
Which ASX shares benefit from a rising dollar?
Whilst some people (mistakenly, in my view) see a strong dollar as a source of national pride, the reality is that a rising currency both helps and hinders the economy in different ways. That's because when our dollar appreciates in value, it both lowers the cost of importing goods and services from other countries and increases the cost of exporting goods and services.
As such, the companies that are the biggest winners from a rising dollar are those that import what they sell. Shares like JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and Wesfarmers Ltd (ASX: WES) will therefore be cheering a rising dollar.
Think of all the TVs, computers, and white goods that companies like JB Hi-Fi and Harvey Norman sell. Or the hardware and office supplies that Wesfarmers' Bunnings and Officeworks chains stock. These are almost always manufactured overseas, and thus a rising dollar makes it cheaper for the companies to import these goods and sell them on to us. They can then pass on these savings to customers at no cost to their bottom lines, or else keep their prices steady and bank the profits.
Which ASX shares lose out from a rising dollar?
Hard truths cut both ways, and so does a rising dollar. Any company that exports goods or services to other countries around the world will be hurting from a stronger dollar. Most prominent will be our mining companies like BHP Group Ltd (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), Newcrest Mining Limited (ASX: NCM) and Rio Tinto Ltd (ASX: RIO). These companies export their iron ore, gold and other resources to countries like the United States and China and will now be receiving less for these resources, in Australian dollar terms.
It's also not good news for companies like the A2 Milk Company Ltd (ASX: A2M), Xero Limited (ASX: XRO), Afterpay Ltd (ASX: APT), Bubs Australia Ltd (ASX: BUB) and any other company trying to sell products and services beyond our shores. These companies will all be taking a hit when they convert their profits back to Aussie dollars and will either have to choose to raise prices to compensate, or otherwise just take the hit to the bottom line.
Foolish takeaway
A fluctuating exchange rate is just one of the inevitable variables that we investors have to accept as part of the investing process. Nevertheless, it's important to understand how things like the Aussie dollar can affect the companies in your portfolio. Hopefully, you now have a better grasp of the impacts that a higher dollar can bring!
