Australian Dollar on back foot amid global and domestic pressures

The Australian dollar (AUD) has recently fallen to its lowest point in over nine years (v GBP), dipping below 60 US cents—a level not seen since April 2020, and above GBP/AUD 2.15, a level not seen since November 2015. This depreciation is the result of a complex combination of international economic developments and domestic fiscal challenges.

Factors Behind the AUD's Weakness:

Rising Global Trade Tensions
The imposition of significant tariffs by former U.S. President Donald Trump has reignited fears of a global trade war, shaking investor confidence and placing downward pressure on risk-sensitive currencies such as the AUD.

Strength of the U.S. Dollar
Recent policy shifts by the U.S. Federal Reserve, including interest rate adjustments, have strengthened the U.S. dollar considerably, thereby applying additional downward force on the Australian currency.

China’s Economic Slowdown
As Australia’s largest trading partner, China’s economic deceleration—exacerbated by its struggling property sector—has led to a drop in demand for Australian exports, further weighing on the AUD.

Domestic Budget Constraints
Increased government spending has limited Australia’s fiscal capacity to respond to external shocks, heightening the vulnerability of the economy and its currency during periods of global stress.

Consequences of the AUD’s Decline:

Improved Export Competitiveness
A weaker Australian dollar makes local goods and services cheaper for foreign buyers, boosting the competitiveness of Australian exports.

Higher Import Costs and Inflation Risk
On the flip side, the cost of imported goods rises, potentially fuelling inflationary pressures domestically and squeezing household budgets.

Policy Options for the Reserve Bank
The Reserve Bank of Australia may consider monetary policy tools such as interest rate adjustments or targeted interventions in the foreign exchange market to stabilise the dollar and mitigate inflation.

Outlook

The Australian dollar’s slide underscores the country’s exposure to global economic volatility, the strength of the U.S. dollar, and its own internal fiscal limitations. Careful economic management and responsive policy action will be crucial in navigating the road ahead.