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Aussie continues slide as Greenback strengthens

The Australian dollar has declined continuously against the US dollar over 2018 to date, as US economic strength and interest rate differentials have combined to force the local currency down. The situation for the Aussie has been similar against the Euro and Yen. Although softening currency conditions are good news for exporters and domestic producers – and certainly feed into rising prices for sawnwood imports – it isn’t all good news.

The chart below shows the Australian dollar’s end-of-month movements against the US dollar, Euro and Yen over the last two years.

fig18

To go straight to the dashboard and take a closer look at the data, click here

It is well understood that the Australian dollar is one of the most traded currencies on the planet. In times of concern in the US and Europe, cash is rapidly moved to Australian dollars, among other currencies, because of our domestic political and economic stability. That also means the currency is often outside our control, and even our national influence.

It can be observed that against the US Dollar, over the last two years, despite its movements as low as USD0.7236, and as high as USD0.7987, the Australian dollar has essentially ended June 2018 (USD0.7391) within close range of June 2016 (USD0.7426). In fact, the Aussie has not been traded up and down as extensively over prior periods.

The roller-coaster has been far more pronounced against the Yen, where economic pump priming remains in force under ‘Abenomics’, and the decline against the Euro has been longer and deeper for similar reasons.

However, we return, as ever on currency matters, to the US dollar exchange rate.

The decline over 2018, almost uniform in appearance, is driven by some significant factors. Most importantly, the US has dragged its domestic interest rates off the floor, making the US dollar more attractive for investors. The differential with Australia’s still historically low interest rate is real and sufficient for capital to flow from Australia to the US.

That is the big deal in currency right now, and it feeds into the domestic economy’s resilience and capacities. There appears to be an underlying concern that the tools of economic correction (be they monetary or fiscal policy) are limited for the Reserve Bank of Australia and the Australian Government right now.

Raising official interest rates could stall the economy and have a serious impact on the housing sector and on still-sluggish business investment. With wages growth muted and price inflation focussed on household essentials (see an earlier item in this edition of Stats Count), increasing the pressure on already indebted households may be stunningly unhelpful.

There are other factors also, some beyond the national influence. But unless there is an ability to move interest rates up, the exchange rate is likely to remain lower in relation to the US in the near term.

Posted Date: August 2, 2018

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