INSIDE INVESTOR: How the dollar affects your investments

For most people, consideration of the exchange rate only comes into play when planning a trip overseas. But as Australia's main conduit to the global economy, it's influence can be tracked almost everywhere.

You know that office comedian, the one who always has a smart line for every occasion.

Whenever global markets look like tanking, the quips begin with lines like: "I’ve shifted all my investments into Australian dollars.” And then a bunch of coins are produced.

Most Australians do have everything in Australian dollars. The family home is usually the biggest investment. There might be some cash in the bank. And perhaps a few shares and maybe even a self-managed super fund.

So for most of us, changes in the Australian dollar is a little surrealistic, an academic idea. About the only time it is given any great consideration is if a trip overseas is being planned.

But the dollar has a far greater effect on everyday life than most people realise. It has a big effect on inflation, which in turn influences how the Reserve Bank behaves when it comes to interest rates. It can affect our property market. And it has a serious impact on our stock market.

We may live in the Lucky Country, a cosy little island nation, but we are connected to the rest of the world in a multitude of intricate and complex ways. And the main conduit to the global economy is through the exchange rate.

Right now, it is playing absolute havoc with our economy. As the mining boom took off a decade ago, the value of our exports went through the roof. That forced the dollar higher, and rightly so. The big miners began expanding their operations, exporting more at even higher prices. So the currency continued to climb.

Non-mining companies, however, felt the sting. And in parts of the country where manufacturing and service industries dominate, firms were forced to lay off workers and cut costs. In some of those areas, the mining boom has felt an awful lot like a recession.

The share prices of those companies have lagged, company earnings have been patchy and property prices have stalled because foreign buyers figure it is too expensive here.

In the past few months, raw materials prices have crashed, and then partly recovered. But they still are a long way short of record levels. The dollar, meanwhile, has kept its head well above parity.

That has forced the Reserve Bank to cut interest rates, in an effort to spur on those hard hit manufacturers and service firms. And if the dollar maintains its strength, the central bank will need to cut a little more.

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