One of Australia’s biggest fund managers, Colonial, is worried about the rising impact of the strong Aussie dollar on its holdings of listed Australian shares.

The catalyst was the move by the dollar past 90 USc over the weekend and the way it stayed there yesterday, and AGL Energy’s surprise earning downgrade yesterday, partly blamed on the impact of the rising dollar on US dollar income from oil revenues from Papua New Guinea.

That downgrade and concern about the dollar saw the market knocked down from yet another record as investors sold off many stocks with US dollar exposure.

The market later stabilised but in the US overnight more uncertainty, continuing from last week as investors and companies saw conflicting news in the way corporate earnings would be going in the third quarter.

As well Citigroup revealed that the $US5.9 billion in write downs and losses had taken a heavy toll on third quarter earnings, which fell 57%. Citigroup is now on investors watch lists for further senior management changes, perhaps the CEO, “Chuck” Prince. As well the big Japanese broking firm, Nomura, revealed hundreds of millions of dollars in losses because of poor subprime investments, and the sacking of 30% of its US work force and as a result around 3,000 jobs will go.

Despite the continuing strength of the China story and our resources boom (the resources sector of the stockmarket is up by around 52% this year), brokers are becoming nervous about the dollar, its impact here, the drought, rising inflation, a possible interest rate rise, and now the huge tax cuts from the Howard Government.

They are seen as being inflationary and pressuring rates. So it was no wonder that Colonial, which manages around well over $145 billion, requested all analysts at its favoured investment banks and broking firms, to provide updates on earnings forecasts of the impact of the Aussie’s rise by the close of business last night.

The fund manager has been working on the impact but the strong move yesterday after 90 US by the Aussie, coupled with the surprising nature of the AGL downgrade (much of it due to poor management and overspending in the domestic electricity and gas retailing sectors), saw Colonial insist on updated research.

CSL is a key stock: it has its AGM in Melbourne tomorrow and that will be well attended by brokers to see if the company downgrades its earnings forecast. Citigroup has already cut its 2008 profit forecast because of the impact of the higher dollar. AGL’s problems with the dollar are shown by the fact that its earnings guidance three months ago for the 2008 year was based on an assumed average exchange rate of 80 cents.

The Company now anticipates that the average rate for FY2008 will be 88 cents.

Peter Fray

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