The Australian dollar plummeted to 93 US cents this morning following US Federal Reserve's plan of "scaling back stimulus measures" ABC reported.
Investor shifted interest to the more stable currency, the US Dollar, playing safe as the withdrawal of stimulus might affect the global economy.
The local currency was at 94.2 cents last night but dropped to a disturbing 92.3 US cents. Consequently, the Australian share market is set to open lower, with the Share Price Index 200 down 56 points to 4,819.
According to Fed Chairman Ben Bernanke, "our purchases are tied to what happens in the economy. The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year."
BK Asset Management managing director Kathy Lien on the other hand said that the Australian dollar was sold off more than other currencies. "The Aussie's been hit the hardest. There's been a lot of people short on the Australian dollar and they were, basically, adding to their short positions" as quoted by The Australian.
According to MS. Lien, those foreign investors who bought Aussie now saw a reason to invest back to the US dollar, increasing its market value, "Less quantitative easing means the Federal reserve is pumping less money into the economy and no longer aggressively devaluing the US dollar."
However a report from The Wall Street Journal said that there can be something positive that can turn out from the Australian dollar drop.
According to the report, shares in Australia resources companies became attractive as the paper shows big price declines due to the drop in Australian dollar.
Take the Australian mining and mining services companies for example. The industry experienced blow this year and have not yet recovered up until this very moment, BUT, the falling industry lured the world's largest asset manager, BlackRock Inc. into buying Australian mining shares mainly because of the bargain price.
According to Macquarie Private Wealth, resources companies had also paid attention to the Australian market since the drop in Australian dollar - "especially those companies that get paid in U.S. dollars bur pay expenses in Australian dollars."
As reported by The Wall Street Journal, "Macquarie has raised sector valuations by an average of around 9% and said BHP Billion Ltd and Rio Tinto PLC were undervalued by 24% and 42%, respectively, based on its estimated net asset values for the companies as of last week."
Tim Schroeders, portfolio manager at Pengana Capital said that "the rising U.S. dollar has been giving with one hand and taking away with the other - Australian weakness this year has been offset by commodity price falls." Pengana Capital has approximately US$1 billion in assets under management.
However, Mr. Schroeders expressed concerns as China remains the top buyer of Australian commodities and not seeing a balance with US counterparts, "It's very difficult to buy these stocks when commodity prices are headed south. Some long-term investors in Australia's resources stocks, after enduring a painful decline in the first half, may reach their pain threshold and finally sell."
"Until we get some sort of catalyst, whether it be takeover activity or a reversal in commodity prices, the medium-term value is not going to be realized."