Just like many currencies across the world, the Australian dollar has also fallen, and this is impacting many Australians, including investors and businesses. As it stands, the currency is valued at roughly 61 US cents which is a marked decline. This trend makes one wonder, why is it so weak, how will it impact the economy, and what will happen next?
The Strength of The US Dollar and Interest Rate Policy
A major reason why the Australian dollar is falling in value is because the US dollar is gaining prominence and value. The US economy is currently on the third interest rate cut cycle and is expected to follow with further cuts. It normally happens that an interest rate reduction weaker the dollar if other currencies are strenge and increases the flow of US to. For some reason, this does not happen. The US dollar keeps losign its power and the Australian dollar barely moves.
The economic future of Australia plays a crucial role in this phenomenon. It comes from a weaker economy that is capturing market expectations and Australia having weaker currency. It is strongly suspected, that Australian is likely to cut interest rate which will further weakens the dollar. If cuts are made, it may extend the fall into 2025.
The Impact of a Weaker Australian Dollar
Higher Costs for Imports and Inflation
With a weaker Australian dollar, it goes without saying that imported goods will become more expensive. One such concern is oil, which is traded in US dollars. A depreciated dollar means more local currency is needed to buy oil, which results in an elevated price for fuel. This removes the optimism of cheap oil. In turn, this raises the cost of transportation as well as the overall cost of living.
As all other firms and companies that depend on imported goods face an exponential inflation, it is retail and construction that feels the hit most from a depreciated dollar. These industries suffer due to the inability to shift the costs to the consumers. This affects the inflation index and consequently raises the cost of living in Australia.
Impact on Travel and Overseas Spending
The users in Australia traveling abroad are not exempt from the financial implications of a depreciated dollar. The weaker dollar suppresses the purchase power of the users, resulting in a pricy experience for everything from hosting, to dining and shopping. When compared to older years, the amount needed for a US dollar has increased significantly which causes distress to those considering a trip to Europe or the USA.
Moreover, certain businesses such as travel agencies and airlines, which operate in Australia and are global tourism dependent, may also find their target markets shrinking since Australians will try to reassess possible international travel plans.
Effect of International Mortgage Lending on Australian Banking
Overseas markets provide Australian banks with a large fraction of their loan capital, which is mainly denominated in US dollars, and this would be of concern in an Australia dollar depreciating environment. These banks now face higher costs of borrowing even though they have some currency swing risk insurance policies.
While these banks do possess some shielding mechanisms from currency fluctuations, increased currency depreciation does raise operational expenses. In this case, it should be a concern if these costs can be transferred to the customers through an increase in interest rates or altered lending fees.
Potential Benefits of a Weaker Currency
The low value of Australian dollar does come with its disadvantages, but like other cases, some sectors which are more outward oriented may benefit from it.
Boost for Exporters
Australian exporters, chiefly in the mining and resources industry, derive profit from a weak currency. When exporters convert their revenues back to Australian dollars after US dollar pegged agriculture products, iron ore, and coal are sold, they receive a higher amount. This is beneficial for companies like BHP and Fortescue Metals.
Moreover, firms like Australian wine and other agricultural industries which export products to markets where US dollars are used will have their products priced more competitively. They can therefore expect greater sales and improved revenue from Australian producers.
Australian Dollar Outlook
The Australian dollar will depend on a multitude of factors ranging from global economic conditions to US monetary policy, and it will also depend on domestic economic policies. Further weakening of the currency may result if interest rates in Australia drop.
Doing so may be detrimental, especially to US equities investors and foreign direct investors because currency movement can have a drastic impact on a portfolio. Having become the norm among fund managers, trades are closed and US currency kept until the value drops. For those having a low tolerance to foreign investments, currency exchange traded funds ETFs or currency options provide some hedging choices.
Final Thoughts
The value of the Australian Dollar in this case is deteriorating which corresponds with global changes in finance structures and poses other grave economic problems. There are some advantages like exports which help because they are globally marketable, however for most Australians the big picture is troublesome for there are adverse effects to inflation, global travel as well as imports. In the coming months, it is crucial to adopt appropriate monetary policies to minimise the ill effects of the exchange rate fluctuations.
