Dollar's Value In A Nano Second

Sun Herald

Sunday April 8, 2007

David Potts

HARD as it is to figure out where the currency is going, I do know the price of an iPod Nano when I see it.

So does Craig James, chief equities economist at CommSec, who's calculated that its price has gone up the equivalent of $US5 this year when you would have expected a fall because of our stronger dollar.

Doubtless Apple has its reasons, such as it doesn't have the foggiest idea whether the dollar will hold up.

Since an iPod is the same wherever you buy it and whatever colour you choose, the fact that it costs $US149 in the US and $US177 here suggests our dollar is undervalued by almost 19 per cent. For iPod parity, our dollar should be worth US95 cents.

Sounds far-fetched - only it would also mean the Chinese yuan should be 20 per cent higher than the US dollar, which certainly rings true.

Especially considering the iPod is made in China.

Until now the dollar has been pushed up by money moving in from Japan, where interest rates are so low as to almost not exist.

On the iPod scale, the yen is undervalued by less than 2 per cent. No potential currency ruction there, so this carry trade, as it's known, seems safe.

The dollar might be rising because the money movers are banking on the Reserve Bank lifting rates next month, as it will if there's a bad inflation result when the consumer price index comes out on April 24, and they're getting in early. Best dressed and all that.

If that's the case, the dollar will run out of puff soon enough.

But if it's rising because somebody is selling US dollars, as distinct from those borrowing low in Japan and lending high here, that can only mean resource companies must be exporting more.

Sure enough, record commodity prices have lifted export earnings, but perhaps at last some production is going through. Er, coming out.

That means the dollar going higher for longer. The improving trade deficit suggests this might be under way as we speak - not before time.

In one of the biggest resource booms ever, the dollar hasn't done well because of the gaping hole caused by runaway spending which, fingers crossed, the Reserve appears to have under control.

With a rising dollar, investing becomes a new ball game. Stocks with a large proportion of overseas earnings such as AXA, Brambles, Cochlear, News Corp, QBE and the like are less attractive.

Winners are the retailers - especially if they sell iPods - Flight Centre, Qantas and most smaller stocks because of cheaper costs.

You also need to think twice about investing in an unhedged international managed fund.

Oh, and buying an iPod.

© 2007 Sun Herald

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