Why is the Australian dollar so weak at the moment?

A combination of a strong US dollar and instability in the Chinese economy have resulted in the Australian dollar dipping so low, the independent economist Nicki Hutley explains.

The US dollar has performed strongly in the last few weeks, boosted by a US Federal Reserve interest rate cut. The value of the Australian currency is also influenced by commodity prices, which depend significantly on China’s economy. “If China’s wobbling, then our economy and demand for exports is also wobbly,” Hutley says.

This isn’t new: China’s economy has been tricky for a while, Hutley says, but currency markets can be quirky and unpredictable.

I’m about to head overseas – am I going to blow my budget?

The Australian dollar has also fallen against the British pound, buying only 0.49 pence on Thursday. Hutley advises everyone heading overseas to ensure they have a currency conversion calculator installed on their phone to make sure they know what they’re really spending, and to avoid bill shock – especially if travelling on credit cards. “Obviously [the weaker dollar] makes things a lot more expensive,” she says.

What does a weak dollar mean for interest rates?

The inflationary pressures of a weak dollar will be a point of issue for the Reserve Bank of Australia when it comes to setting interest rates, but it’s not clear to what extent it will affect its decision.

In December, the RBA seemed to suggest it was considering a rate cut in February. Sean Callow, an analyst at InTouch Capital Markets, told the Australian Financial Review the RBA would see a weak dollar to be “cause for concern about what might turn up in the next inflation numbers”, while AMP’s chief economist, Shane Oliver, told news.com that if the dollar continued its downward slide, it could impact the next rate decision.

Hutley notes that the RBA may have already taken the dollar’s increasing weakness into account when the board it made its comments just before Christmas, and concerns about inflation may be offset by the increased competitiveness of Australian exports. But if US interest rates are not going to go down as much as they have been recently, then there might be more weakness in Australian currency, which may make rate cuts here a bit more difficult, she says.

So should I be worried about the economy this year?

Australians have been enduring higher prices, a higher cost of living, and higher interest rates for a few years now. Hutley says she believes that while the Australian economy is starting to settle, things will continue to be tough, with the incoming US president the most likely source of external shocks.

Higher tariffs threatened by Donald Trump have been one of the reasons for the US dollar’s recent strength. Callow told the AFR he thought the Australian dollar could easily go lower than 60 US cents off the back of those policies when Trump comes to power later this month.

Tony Sycamore, an IG Australia market analyst, wrote in a recent investor note that the fate of the Australian dollar would largely depend on developments after Trump’s inauguration on 20 January. The US president-elect threatened to raise tariffs on Chinese imports to 60% or higher. They currently average 17%, but the market consensus was that they may rise to about 40%, Sycamore wrote. Any higher, and they were “likely to weigh heavily on AUD/USD”.

The 60 US cent mark was “psychologically significant”, Sycamore wrote. There was “scope to extend towards resistance” if the Australian dollar could hold against any further drops and push upward to 63.50 US cents prior to the inauguration.

Hutley says that US policies resulting in a weakened Chinese economy could keep the Australian dollar under pressure in the year ahead, which might mean interest rates stalling again while the RBA balances the weaker currency with a weaker economy. However, if the Chinese government decides to create more stimulus, or Trump’s policies are slower to come into effect or changed significantly, the outlook may be different.

“I think we’re far from out of the woods, as there’s a great deal of uncertainty,” Hutley says. “People shouldn’t get too gloomy just yet, but be aware that there are significant risks.”