The Australian dollar has fallen below 74
US cents, with levels almost below 73 US cents in early July. This dip was the
lowest level the local currency has been since early 2017, with some experts
predicting even lower levels in the months ahead. Whether you're running a
large export business or simply doing your best to run a family, a strong or
weak Aussie dollar can have a considerable impact on the price of investments
and the cost of everyday household items.
Currency experts are far from united on the
future of the Aussie dollar, with some predicting a significant crash and
others expecting the currency to surge on the back of recent lows. While the
foreign exchange market is always difficult to predict, divergence between
commentators is more pronounced than usual. Like always, the future of the local
currency depends greatly on domestic growth, the speed of the US recovery, and
the economic situation in China.
There has been a steady, staircase-like
rise in US interest rates since early 2017, with two jumps already seen in
2018. There's very little doubt that the Federal Reserve will raise interest
rates again later this year, the question is how soon and how many times?
There's even significant disagreement within the Fed's own committee, with at
least one more rate hike expected later this year. US rates are now higher than
Australia's for the first time in 17 years, at 2 percent compared to 1.5
percent.
While it's never quite this simple, higher
US interest rates generally make America a more attractive place to invest,
with money moved away from Australia and less demand for the local currency
being the end result. With US rates now higher than Australia's after such a
long cycle, money is flowing out of the country. The Aussie dollar dropped
almost 3 percent in a single week back in April, as the US dollar found favour
with investors amid a pick-up in 10-year US Treasury yields. For the most part,
the struggling local currency is the result of a strong US dollar.
The Australian dollar is also taking its
cues from movements in the offshore traded Chinese yuan, with much of this
movement related to a rise in US-China trade tensions. A number of major assets
recently tumbled after the United States confirmed it would impose tariffs on a
further $US200 billion worth of China's imports, including the Australian
dollar, gold, oil, base metals, and a range of global stocks. Additionally, the
Chinese currency was effectively devalued by 2 percent in late June, its
biggest devaluation in almost three years.
According to NAB's senior foreign exchange
strategist Rodrigo Catril, "The Australian dollar is often seen as a
liquid proxy option for emerging market exposure given the strong Australian
economic links with China... Thus it is not surprising to see the Australian
declining amid the current trade-driven global growth concerns." As long
as global trading conditions remain in uncertain territory and US interest
rates keep growing, the Australian dollar will struggle to find upward
momentum.
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