The Australian dollar has come under pressure recently as it dropped below 62 US cents for the first time in over two years. On Friday afternoon, it was trading at 62.11 US cents, similar to last week’s rate, after hitting a low of 61.83 US cents on Thursday.
Except for a few days in October 2022, the Aussie has not been below 62 US cents since late March and early April 2020, when it dropped to levels last seen during the 2008 global financial crisis. Despite its current rate, which is 10% lower than the beginning of October when it was above 69 US cents, the Australian dollar remains weak.
The decline in the Australian dollar value is more due to the strength of the US dollar rather than weakness in the Australian dollar itself. The US dollar has strengthened by 7.6% to a 26-month high against a basket of six other currencies. This increase can be attributed to factors such as Donald Trump’s win in the US presidential election and his proposed policies like tax cuts, increased spending, and tariffs, which have impacted the outlook on US rate cuts for 2025, now anticipated to be fewer than previously expected.
IG analyst Tony Sycamore said Trump was likely to implement tariffs on imports, which would dampen growth expectations outside the US and weigh on commodity prices. The Australian and New Zealand dollars were particularly vulnerable to risks of Chinese tariffs, he said. A dovish pivot by the Reserve Bank in December after the release of lacklustre third-quarter gross domestic product figures has also put pressure on the Australian dollar as interest rate differentials play a big role in determining currency values.
Mr Sycamore said the Aussie had priced in a lot of bad news in a short time and could rebound from here if it managed to hold above 61.70 from October 2022. Falling through that support level would open the way for a slide to 60 US cents, he said. A weaker Australian dollar would make holidays in the US more expensive and increase the price of imported goods including petrol and vehicles.
‘Buying products from overseas become more expensive, perhaps prohibitively so, while holidays overseas also become costlier,’ Capital.com analyst Kyle Rodda told News.com.au However, it would also make Australian exports more competitive and make the country a more attractive tourist destination. ‘On the flip side, our exporters benefit from the falling prices that come with a lower Aussie dollar. While some domestic tourism can benefit from the fact that people are more inclined to travel here – noticed all the Americans around recently? – and Aussies are more likely to holiday locally.’
None of the big banks have changed their predictions for rate cuts in 2025 despite the slide in the currency. But AMP chief economist Shane Oliver warned that if the dollar continues to drop, it could impact the Reserve Bank’s next decision on rates.
‘Imports account for between 10 to 15 per cent of the (consumer price index), so it can have a significant impact,’ Dr Oliver told Newswire. ‘It means every fall in the Aussie dollar by 10 per cent adds 0.1 to 0.15 per cent to inflation. If it keeps falling from here – say 20 per cent since the start of 2024 – it could have an impact on the RBA’s decision.’
Mr Roudda warned for the AUD to reverse its downward course, Australia would need to see a moderation in US growth, and an increase in Chinese economic activity. ‘Without either, it’ll be difficult for the AUD/USD to pick-up meaningfully. Conversely, if Trump leads to a pick up in inflation and higher interest rates than expected in the US, and the trade war really hits China hard, then AUD/USD could slip below 60 cents.’
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