The Australian dollar has been under pressure after falling below 62 cents for the first time in more than two years.
The Australian dollar was buying 62.11 US cents on Friday afternoon, around where it was trading last week, after falling as low as 61.83 US cents early on Thursday.
Apart from three days in October 2022, the Australian dollar has not been below 62 cents since late March and early April 2020, the first time it hit such a low level since 2008, during the global financial crisis.
Its level on Friday remains 10 percent lower than early October, when the Australian dollar was buying more than 69 US cents.
The decline has been more a matter of US dollar strength than Australian dollar weakness, with the dollar rising 7.6 percent to a 26-month high against a basket of six other currencies during that time.
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 by 2025, with lower expectations than expected previously.
IG analyst Tony Sycamore said Trump was likely to implement tariffs on imports, which would dampen growth expectations outside the United States and hit commodity prices.
The Australian and New Zealand dollars were particularly vulnerable to the risks of Chinese tariffs, he said.
The dollar has not been below 62 US cents since late March and early April 2020. Australians will face more expensive overseas holidays as a result.
A dovish turn by the Reserve Bank in December following the release of lackluster third-quarter gross domestic product figures has also put pressure on the Australian dollar, as interest rate differentials play a major role in determining of currency values.
Sycamore said the Australian dollar had priced in a lot of bad news in a short time and could rally from here if it managed to stay above 61.70 from October 2022.
Falling above that support level would open the way for a drop to 60 cents, he said.
A weaker Australian dollar would make holidays in the United States more expensive and increase the price of imported goods, including oil and vehicles.
“Buying goods overseas becomes more expensive, perhaps prohibitively so, while holidays abroad also become more expensive,” 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 other hand, our exporters benefit from the fall in prices that comes with a lower Australian dollar. While some domestic tourism may benefit from the fact that people are more inclined to travel here, have all Americans noticed that recently? – and Australians are more likely to holiday in the area.’
AMP chief economist Shane Oliver warned that if the dollar continues to fall, inflation could persist.
None of the big banks have changed their predictions for rate cuts in 2025 despite the currency drop.
But AMP chief economist Shane Oliver warned that if the dollar continues to fall it could affect the Reserve Bank’s next rate decision.
“Imports make up 10 to 15 percent of the (consumer price index), so they can have a significant impact,” Dr. Oliver told Newswire.
‘This means that every 10 per cent fall in the Australian dollar adds between 0.1 and 0.15 per cent to inflation.
“If it continues to fall from here (say 20 percent from the beginning of 2024) it could have an impact on the RBA’s decision.”
Roudda warned that for the AUD to reverse its bearish course, Australia would need a moderation in US growth and an increase in Chinese economic activity.
‘Without either, it will be difficult for AUD/USD to rally significantly. Conversely, if Trump causes a spike in inflation and higher-than-expected interest rates in the US, and the trade war really hits China hard, then AUD/USD could fall below 60 cents. .