The Australian dollar has been under pressure after dropping below 62 US cents for the first time in more than two years.
The Australian dollar was trading at 62.11 US cents on Friday afternoon, maintaining its position from the previous week. However, it had dropped to 61.83 US cents early on Thursday before recovering slightly.
Except for a few days in October 2022, the Australian dollar has not dipped below 62 US cents since the period between late March and early April of 2020. This was the first time it had fallen to such levels since 2008, during the global financial crisis.
Its level on Friday is still 10 per cent lower from the start of October, when the Aussie was buying more than 69 US cents.
The decline in the Australian dollar’s value can be attributed more to the strength of the US dollar rather than any significant weakness in the Australian currency. The greenback has surged by 7.6 percent, reaching a 26-month high against a basket of six other major currencies during this period.
Donald Trump’s victory in the US presidential election and his promised policies of tax cuts, increased spending and tariffs have led to a more cautious outlook on US rate cuts for 2025, with fewer expected than previously predicted.
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.
The dollar has not been below 62 US cents since late March and early April of 2020. Aussies are set to face more expensive overseas holidays as a result
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.’Â
AMP chief economist Shane Oliver warned that if the dollar continues to drop it could cause inflation to lingerÂ
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.’Â
