Australian Dollar Continues to Struggle, Drops Below 62 US Cents

The Australian dollar has reached a worrying low, approaching its weakest point since the early days of the COVID-19 pandemic.

During the New Year holiday period, the Australian dollar fell below 62 U.S. cents for the first time since October 2022, resembling the struggles of late March and early April 2020.

As of late evening on Jan. 2, the currency slightly recovered to 62.15 U.S. cents, still down almost 10 percent since early October 2024.

The decrease in the Australian dollar is not solely a result of Australian weaknesses but is mainly due to the strengthening of the U.S. dollar.

The greenback has climbed by 7.6 percent, reaching a 26-month high against a basket of six other major currencies.

This surge has largely been fueled by the better-than-expected performance of the U.S. economy, along with a shift in market expectations surrounding U.S. interest rates.

Economist Saul Eslake pointed out that the ongoing strength of the U.S. dollar is mainly a reflection of the resilience of the U.S. economy, despite high interest rates.

According to Eslake, “Trump’s policies on tariffs, deporting migrants, and increasing the budget deficit even further will be inflationary, and thus, U.S. interest rates won’t decrease much further in 2025, while they are forecasted to do so in other countries.”

The anticipated inflationary pressures in the U.S. are expected to maintain the dominance of the dollar in the foreseeable future.

Global Impact of the Australian Dollar’s Weakness

Although the Australian dollar has fallen by around 7.5 percent against the U.S. dollar over the past year, its decline is less significant against other major currencies.

The currency has only depreciated by about 2 percent against the euro and 0.75 percent against the Canadian dollar, while it has actually appreciated against the yen, New Zealand dollar, and Korean won.

Eslake also noted that the devaluation of the Australian dollar is not entirely negative. It benefits exporters in industries like mining and agriculture, as a weaker Australian dollar makes Australian products more competitively priced internationally.

However, he highlighted other factors contributing to the decrease of the Australian dollar, such as the gradual decline in global commodity prices and the ongoing economic challenges in China, which have maintained deflationary pressures.

Eslake explained that the Reserve Bank of Australia’s (RBA) Australian export commodity price index indicates a nearly 14 percent decrease in the value of export commodities in U.S. dollar terms from its peak in January last year.

Meanwhile, the slow economic recovery in China continues to weigh on the Australian currency.

Economic Impact of a Weak Dollar

A weaker Australian dollar raises the cost of imports, potentially leading to inflation, but it also bolsters Australia’s export sector by making Australian products more affordable internationally.

Eslake believes that these dynamics are unlikely to prompt immediate alterations in RBA policy, as the decline in the currency is not yet substantial enough to halt possible rate cuts.

He stated that a much more significant drop in the Australian dollar would be necessary to make the RBA reconsider its stance.

In industries like mining and agriculture, a weaker dollar is considered advantageous, while tourism and sectors reliant on imports may face increased expenses.

IG analyst Tony Sycamore highlighted the possibility of a recovery in the Australian dollar if it remains above the 61.70 level, but a drop below this level could result in a further decrease to 60 U.S. cents.

“Aussie had priced in a lot of bad news in a short time and could rebound from here if it managed to hold above that 61.70 level from October 2022,” he said.

AAP has contributed to this article