Why is the Aussie Dollar so low? [Gianluca Cammarata – Eco 2]

Have you been noticing the Aussie dollar to the US dollar decreasing more each day? Less than 10 years ago, the AUD was trading at ($1.10) to the USD. It today recorded ($0.66), close to half, reaching an 11 year low. So why is this case, and is it a good or bad thing?

Nations often lower interest rates in a bid to stimulate the economy. Lower interest rates tend to attract people within the country to borrow and spend more, but this tends to lower the demand for the currency outside the borders of that nation, and therefore in theory that currency will drop.

Although the Aussie dollar is low, the American dollar is rising. This is because in volatile economic times (COVID-19), government bonds, specifically American government bonds, are seen as a safe haven for investors. .

However, these are not the sole reasons for the weaker Aussie dollar. Australia exports over 30% of their goods to China, and the ongoing trade war with the USA has had a significant impact down under.

Although the dollar recovered a touch in October after the announcement of a phase 1 deal between the USA and China, it is predicted that an overall settlement will only hurt Australia’s currency and economy in the long term. Part of the agreement states that China must spend over $200 billion on US goods over the next years, meaning they will be substituting many of the goods purchased in Australia with American ones, such as iron ore (43% of Australia’s export to China).

Despite popular belief though, a relatively weaker currency isn’t all bad news. Yes, a stronger currency means that the inflation rate will be lower, that the overseas Summer getaway you’ve been planning won’t be so expensive, and that foreign goods won’t be as costly. But, it also means in theory that exports will be cheaper to other countries, meaning more profit for businesses, meaning they can employ more people, which then means there will be more people with more money to spend (similar effect to low interest rates).

Volatile economic times, low interest rates and an ongoing trade war between two of the biggest economic powerhouses in the world are all contributing factors to the record low Aussie dollar. But its not all bad news.

Share your thoughts, should we be worried about the ever decreasing dollar, or is it just what our economy needs?

Sources:

• https://theconversation.com/explainer-what-a-strong-australian-dollar-actually-means-699
• https://globaledge.msu.edu/countries/australia/tradestats
• https://smartasset.com/investing/what-does-it-mean-to-have-a-strong-currency
• http://www.forex-central.net/impact-of-interest-rates-inflation-on-currencies.php
• https://fairmontequities.com/why-is-the-aud-dollar-going-down/
• https://www.afr.com/wealth/personal-finance/how-to-benefit-from-the-low-aussie-dollar-20191202-p53fwx