Some stocks on the ASX have exposure to the US dollar which means that if the US dollar falls, these stocks can be affected in either a positive or negative way. Here is an explanation of how a lower U.S. dollar (USD) affects Australian stocks (ASX), covering the economic, financial, and sectoral perspectives.

1.The USD and AUD Relationship

The U.S. dollar is the world’s dominant reserve and trade currency, while the Australian dollar (AUD) is considered a “commodity currency,” meaning its value is closely tied to global demand for commodities such as iron ore, coal, gold, and natural gas — Australia’s major exports.

When the USD weakens, the AUD typically strengthens in relative terms, because investors shift capital away from the U.S. toward other economies perceived as more attractive or higher yielding. This inverse relationship is key to understanding how a weaker USD influences Australian markets.

A stronger AUD has ripple effects across Australia’s economy and equity markets, influencing corporate earnings, competitiveness, investment flows, and inflation expectations.

2.Trade and Export Dynamics

a.Pressure on Exporters

Many of Australia’s largest publicly traded companies — including BHP, Rio Tinto, and Woodside Energy — are heavily dependent on exports that are priced in USD. When the USD falls, and the AUD rises, these companies face a currency translation issue:

• Their revenues are denominated in USD but must be converted into AUD for reporting and taxation purposes.
• If the AUD is stronger, each U.S. dollar earned abroad converts into fewer Australian dollars.
• As a result, reported earnings decline, even if global commodity prices and sales volumes remain constant.

This means that, in isolation, a weaker USD can dampen profit margins for major exporters and resource producers.

b.Impact on Competitiveness

A stronger AUD also makes Australian goods and services more expensive to foreign buyers, potentially reducing export volumes over time. For example:

• Tourism and education become more costly for overseas visitors and students.
• Manufactured exports and agricultural goods may lose price competitiveness in global markets.

These effects can drag on sectors such as tourism, international education providers, and exporters of agricultural commodities (e.g., beef, wine, wheat).

3.Importers and Domestic Businesses Benefit

While exporters may struggle, import-dependent industries and domestic-oriented companies often gain from a lower USD (and stronger AUD):

• The cost of imported goods, machinery, electronics, and fuel decreases in AUD terms.
• Retailers (e.g., Wesfarmers, JB Hi-Fi, Harvey Norman) benefit from lower input and inventory costs.
• Transport and logistics companies see lower fuel expenses, improving margins.

4.Commodity Prices and the USD

Commodities — such as iron ore, coal, gold, and oil — are typically priced in U.S. dollars on global markets. There is a historical inverse correlation between the USD and commodity prices:

• When the USD weakens, commodities often rise in price, as they become cheaper for buyers using other currencies.
• Higher commodity prices can boost global demand and support revenues for Australian miners and energy companies, partially offsetting the adverse impact of a stronger AUD.

5.Global Capital Flows and Risk Appetite

The value of the USD also reflects global investor sentiment. A weaker USD often coincides with a “risk-on” environment — meaning investors are more willing to take risks and allocate capital to equities and emerging or commodity-linked markets, like Australia.

In such scenarios:

• Global funds may flow into the ASX, seeking exposure to cyclical growth and commodity themes.
• The Financials sector (including banks like CBA, NAB, and Westpac) can benefit from stronger credit growth and improved investor confidence.

However, if the USD falls because of economic weakness in the U.S., or global risk aversion increases, the sentiment could reverse, leading to volatility in both the AUD and the ASX.

Lauren Hua is a private client adviser at Fairmont Equities.

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