Beware the falling dollar's snare

As the local dollar spirals downward at a rate of knots, all Australian enterprises need to calculate hidden currency risks and protect against them.

Beware of the falling Australian dollar. Vast numbers of Australian enterprises have been wishing for a lower Australian dollar for a long time.

Now it’s happening and in theory we should be rejoicing but the speed and size of the current Australian dollar reversal will trap many unwary enterprises.

Exactly two months ago the Australian dollar was calmly trading at 105.46 US cents. Last night it hit 93.27 US cents – a fall of 11.5 per cent.  That’s a huge fall in a short time and there is likely to be a lot more to come over time.

The Australian dollar is still being boosted by overseas investment in the big LNG construction projects and the fact that our interest rates are still higher than those in other countries.

But the world is starting to understand that Australia has become a high-cost miner at a time when prices are falling, while reversing the damage created by the Gillard mistakes will not be easy.

Overseas investors in our shares are now getting out, having suffered big losses as the combination of lower share prices and a lower Australian dollar make the Australia share market one of the worst performing in the world.

Last night I was in the company of a person whose 17-year-old apprenticed son had been retrenched by a kitchen cabinet company which will now source most of its cabinets from Asia (probably China) rather than make them here.

The overseas supplier strategy is, of course, to get the locals to shut down and then put up the price. But if demand increases, the looming kitchen cabinet price rises will now be multiplied by the lower Australian dollar.

So longer term  a vast number of builders are in danger of being caught by steeply rising kitchen cabinet prices, which in the past would not have been vulnerable to import pricing.

Australia is good at making kitchen cabinets and what’s happening in that industry is a perfect example of the Dutch disease, where good businesses are shut down because of a resource-inflated currency.

But kitchen cabinets are only a small example. Imported food prices will rise, so catching out restaurants that are too slow to adjust their menu prices.  There are thousands of other examples.

Although demand may be weak, prices will have to rise and/or employees be retrenched because we have rigid labour systems.

Although our currency firmed last night after hitting its low there is nothing to stop it falling a lot further in coming months. About five years ago our currency was trading just over 60 US cents. I am not forecasting that it will go back to that level but such a fall is conceivable over time.

So enterprises of all sorts need to isolate hidden currency risks and protect against them. And those travelling overseas need to make sure they are dealing with people who have sound financial backing when advance payments are required.

In my overseas  travels last week I noticed the impact of the falling currency but, as if to remind me of what was ahead for the Australian dollar, I did not find dining in traditionally high cost Switzerland expensive when compared to Australia.