As the Aussie dollar falls against the US dollar, more economic pressure looms for households
The Australian dollar has become a little unpopular of late.
In April it was trading above 75 US cents, but this week it’s fallen below 70 US cents. For currency market watchers, that’s a sizeable move in just a couple of months.
On Thursday, it slipped towards 68 US cents (68.82 US cents at 3.30pm AEST).
It’s now close to where it settled during the pandemic-induced financial crisis.
As professional investor Danielle Ecuyer tweeted, “AUD under US0.69 — risk off, risk off, risk off”.
That’s market jargon for “sell, sell, sell”.
The sharp fall in the Australian dollar coincided with another broad and sharp sell-off on the Australian Stock Exchange.
But it’s the dollar that’s likely to put pressure on every Australian hip pocket nerve.
The lower the dollar falls, the more upwards pressure it will put on inflation and, of course, the cost of living. That’s because the dollar in your pocket doesn’t go as far when you’re buying something made overseas.
So just how much extra pressure is it likely to add to already squeezed household budgets?
Will the dollar fall further?
The fear at this juncture is that the Australian dollar has further to fall.
There are several forces putting downward pressure on the value of the Australian dollar versus the US dollar.
They include concerns about how the ongoing pandemic will influence China’s economic growth and therefore its demand for Australia’s commodities, like iron ore. The stronger China’s demand for iron ore, coal and gas, the more interest there is in Australian dollars.
Also, the US Federal Reserve is in the process of raising interest rates, and potentially quite aggressively. The higher US interest rates go, relative to Australian interest rates, the more demand there is for US dollars, and the less demand for Australian dollars and the value of our currency falls.
The Aussie dollar is also negatively affected by poor market sentiment, or pessimism about the global economy. And this is being made worse by the prospect of rising global interest rates.
Westpac’s currency strategist Sean Callow says, in the short term, the local currency is likely to drop to 68 US cents – roughly where it was in June 2020. There is no telling whether it will go up or down from there.
Who will feel the impact?
Just about every Australian feels the impact of a rising and falling dollar.
Business owners feel the pain when the cost of purchasing equipment sourced from overseas rises. On the flip side, their exports become cheaper and more competitive.
Households feel the effects when they go shopping and realise the goods they purchase have risen in cost.
Travellers also feel the hip pocket nerve when they go to exchange their dollars for greenbacks, and realise they’ve received less than they expected.
Economists, though, consider anything below 75 US cents to be favourable for exporters.
Yet the lower the dollar falls the less purchasing power shoppers have — that’s where it hurts many of us day-to-day.
We are already feeling it
The lower dollar comes at a time when consumers are feeling, well, quite miserable actually.
The ANZ-Roy Morgan consumer confidence index fell by 0.2 per cent last week to a 20-month low of 90.5 points. Consumer views on whether it is a good ‘time to buy a major household item’ dropped 2.2 per cent in the past week to a 2-year low of -15.9 points. And the Westpac-Melbourne Institute Index of Consumer Sentiment fell by 5.6 per cent to 90.4 in May. The Index is now at its lowest level since August 2020.
Business conditions and profitability are doing nicely thank you very much, but confidence among bosses isn’t all that crash hot at the moment. Business confidence, as measured by the National Australia Bank (NAB), eased in April.
What AUD-US exchange rate will hurt the most?
So, realistically, at what level against the US dollar is the Australian dollar likely to hurt your family budget?
ANZ senior economist Catherine Birch says it’s difficult to quantify the level but that the dollar would need to fall further and stay there for a considerable period of time, for it to put upward pressure on inflation and the cost of living.
The NAB’s chief economist is optimistic the Australian dollar won’t do any damage to household budgets.
“[The dollar would need to fall a] long way and lags typically 12 months-to-two years,” Alan Oster says.
Forecasting precisely where the dollar will go is fraught with risk, and difficult to predict. However real wages are not expected to increase for another couple of years, and that’s before considering the affects of a falling dollar on consumers’ purchasing power.
If the currency tide turns against the dollar and it falls significantly further, it will weigh heavily on every household budget in the country.
An aggressive Reserve Bank monetary policy tightening program (raising interest rates) would help stem the tide, but that would also create further headaches for households.
You could be forgiven for thinking you’re damned if you do and you’re damned if you don’t in this economic climate.
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