By MILLIE MUROI, Economics Writer
The Aussie dollar seems to have been slammed by a truck over the past few weeks, but it’s not all bad news. Plenty of people – not just overseas friends paying us a visit or buying our stuff – will be lapping up the benefits.
As we rang in the new year, we rang in two since the Australian dollar could buy more than US70¢. Now, it’s scratching about at US62¢. You’d have to trek back to the early 2010s to find a time when one Aussie dollar was worth more than an American dollar (mostly thanks to higher commodity prices at the time).
So, what’s left the Australian dollar wallowing in foreign exchange market mud? And who are the people likely to be rolling in it?
Let’s start with how we put a price on the dollar. Like most things, there’s a market for Aussie dollars where people buy and sell. You’ve probably participated in this market whenever you go overseas and need foreign currency.
Aussie dollars are bought and sold for other currencies (there’s no point buying our own currency using … our own currency). That’s why the value of the Australian dollar – the exchange rate – is always expressed in terms of some other country’s currency, often the US dollar, because it’s the most widely used in international transactions.
A better measure of the value of our currency, though, is the trade-weighted index, which is the price of the Australian dollar in terms of a basket of foreign currencies based on their share of trade with Australia. The more we trade with a country, the heavier the weighting of their currency in this basket. Changes in the Chinese yuan are the most influential when measuring the Australian dollar’s value in this way – although it’s not often the one you hear quoted in the media.
Our exchange rates are almost always changing – at least on weekdays, when the foreign exchange market is open 24 hours a day. As with most other things we buy and sell, the price we pay depends on how much demand and supply there is for our currency and everyone else’s.
When the amount of Aussie dollars that people want to buy at a particular time exceeds the amount of Aussie dollars that other people want to sell at that time, our exchange rate – the price of the Australian dollar – steps up, which is called an “appreciation”. When supply of Aussie dollars exceeds demand, we see the exchange rate fall: a “depreciation.”
What might push up demand for our currency? Tourists coming to visit us may buy our currency so they can pay for a swish Airbnb in Sydney or coffee in Melbourne. Foreigners might also want to buy other assets priced in Australian dollars such as a business, company shares or Australian government bonds. And Aussie exporters, if they’ve been paid in foreign currency for their goods and services, may want to cash in for currency they can use at home.
By the same token, some of our Aussie business owners might want to import goods and services, or inputs such as equipment, which are priced in, say, US dollars. Aussies may also want to invest in overseas companies or buy US government bonds. Or we may just need overseas currency to take with us when we jump on a plane to our next exotic destination.
Because our exports are so dependent on the mining industry, commodity prices also greatly affect our exchange rate. When the price of minerals such as iron ore heads north, so does the value of the Australian dollar because our overseas buyers need more Aussie dollars to buy it from us.
Demand for Australian dollars – and therefore the exchange rate – is also affected by things like the difference in interest rates between Australia and the rest of the world. When our interest rates are higher relative to overseas, the value of our currency increases because investors become more attracted to the idea of depositing cash here – for which they’ll need Australian dollars. Even hints at where our interest rates might sit, relative to those overseas in the future, can sway the exchange rate by shifting people’s expectations and therefore what currencies they want to hold more of.
Interest rates are still a touch higher in the US than here, but when the US Federal Reserve said last month that it expected fewer rate cuts in 2025, it signalled interest rates there might stay higher than most people had been expecting. That made the prospect of depositing cash here, in Australia, less attractive than before, and reduced demand for our currency.
At the same time, China, our biggest trade partner, is growing its economy at a crawl – especially when compared to recent decades. While we’ve relied on them purchasing vast amounts of our exports in recent years, many are expecting a continued slowdown, which means demand for the Aussie dollar is likely to stay low, reducing its value.
A sustained fall in the value of the Aussie dollar is bad news for our importers, who will have to pay more for the things they buy, as well as Australians travelling overseas. But it’s good news for our exporters, who will earn more Aussie dollars from selling Australian-made goods and services abroad, as well as Australian businesses competing with imports for customers in the domestic market (as imports become relatively more expensive, Aussie customers are more likely to opt for Australian goods and services). This all reverses when there’s a sustained rise in the value of the Australian dollar.
Basically, a fall in the Australian dollar improves the price competitiveness of our export industries, as well as those industries where Aussie businesses are competing heavily with imported substitutes. This has an expansionary effect on our economic activity as demand for our goods and services increases.
But a fall in the Aussie dollar can also be inflationary for us because it pushes up the cost of imported goods and services. We’re now having to pay more for the things we import, such as cars, electronics and many medicines. A rise in the Australian dollar can, on the other hand, dampen inflation.
While the recent fall in the value of the Australian dollar might catch the Reserve Bank’s attention, it’s not likely to affect their decisions greatly. That’s partly because it’s impossible to predict where the dollar will go next. Up and down movements are pretty common and, like most things in life, these changes have both costs and benefits.
The long-term effect of a weak dollar is also generally positive, with more jobs and spending by foreigners in our export sectors giving the economy a bit of a tailwind. Not everyone will be better off, but a weaker Aussie dollar is far from the disaster it’s often made out to be.
