Why is the Australian dollar falling – and what does it mean for interest rates, travel and the economy?

A picture


The Australian dollar has had a rocky start to the year, dropping below 62 US cents on Wednesday and hitting a low of 61.84 US cents on Thursday morning.Although it has recovered slightly in early trade on Friday, it has been on a steady downward trajectory since 30 September last year, when it bought 69.32 US cents.But Thursday was the first time it has been below 62 US cents since 2022.

So what does this mean for interest rates, travel and Australia’s economy in the coming year?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.Sign up for Guardian Australia’s breaking news emailThis isn’t new: China’s economy has been tricky for a while, Hutley says, but currency markets can be quirky and unpredictable.

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.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 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.

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.

societySee all
A picture

‘It was a light in the dark’: how a bakery transformed lives in war-torn Mostar

Jasmin Elezović was six years old when his home became a war zone.It was 1993 and the historic city of Mostar, straddling the Neretva River in southern Bosnia and Herzegovina, had become the centre of some of the most vicious fighting of the Bosnian war, which had begun more than a year earlier.Elezović and his mother were living with two other families in a small flat in the east of the city, the frontline barely 200 metres from their door. For nine months that year Mostar was under siege, split in two by brutal fighting, with 60,000 people in the eastern part of the city under relentless bombardment by fighting forces identifying as Croats.His recollections of that time are scattered and bleak

A picture

Guardian and Observer readers raise £1.25m so far in charity appeal

With just over a week to go, an incredible £1,250,000 has been raised by generous readers for the 2024 Guardian and Observer appeal in support of victims of conflict and war.Three charities will benefit from the appeal: Médecins Sans Frontières (MSF) and War Child, which carry out frontline medical aid work in war zones, and Parallel Histories, which helps schools teach sensitive and controversial histories such as those of Northern Ireland, Israel and Palestine.The overall total stood at £1,262,000 at midday on Friday, with more than 11,200 readers donating to the appeal. It is the 10th year in a row the annual appeal has raised over £1m. Over the past decade it has raised just short of £15m for good causes

A picture

Fixing England’s social care will be biggest challenge yet for Louise Casey

She is the no-nonsense civil servant from Portsmouth who was called upon by four prime ministers to tackle deep-rooted social issues, including rough sleeping, antisocial behaviour, victims’ rights and troubled families.Now Louise Casey has been tasked by a fifth to chair an independent commission into adult social care. Her mission? Develop a plan to save the sector.Lady Casey must build a consensus around a new national care service able to meet the needs of millions of older and disabled people for decades to come. It will be her toughest challenge yet

A picture

Loneliness linked to ill health through effect on protein levels, research suggests

Loneliness has long been associated with ill health but researchers say they have fresh insights into the link between the two.While poor health can result in people becoming isolated and lonely, studies have also suggested loneliness can itself lead to poorer health.Now researchers say they have unpicked a mechanism for the latter relationship, finding loneliness can affect the levels of a handful of proteins associated with various diseases and even death.Prof Barbara Sahakian, a co-author of the study at the University of Cambridge, said the World Health Organization had declared social isolation and loneliness a major problem in the world. “I think the message is that we’ve got to start to get people to realise that it’s part of a health thing, both for their mental health and their wellbeing but also for their physical health, that they have to remain connected with other people,” she said

A picture

Cross-party talks on adult social care reform in England to start next month

Cross-party talks over the future of social care will begin next month as the health secretary hit back over criticism that a commission on the issue would take too long to bring about change.Wes Streeting said he wanted all parties to “agree on the direction on social care for the long term” and that the Conservatives, Liberal Democrats and Reform party had all said they would work together on it.An independent commission to reform adult social care in England was launched on Friday but attracted criticism for kicking much-needed reforms “into the long grass”. Its final recommendations will not be made until 2028.The taskforce, led by the cross-bench peer Louise Casey, will be charged with developing plans for a new national care service, which was a key Labour election manifesto pledge

A picture

Police investigate reports of prison attack on Sara Sharif’s father

Police are investigating reports that the father of the schoolgirl Sara Sharif had his throat cut in an assault by fellow inmates while in prison for her murder.Urfan Sharif, 43, is said to have been attacked in Belmarsh prison, south London, by two men who rushed into his cell with a weapon made from the lid of a tuna tin, according to the Sun. The assault is said to have happened on New Year’s Day and caused injuries to his neck and face that are understood to have been treated in prison.The Metropolitan police said in a statement they were investigating an allegation of assault at Belmarsh.Sharif was sentenced to life imprisonment last month, along with Sara’s stepmother, Beinash Batool, 30