The Aussie dollar has further to fall

The Australian dollar, or Aussie, has sunk to a six-year low against its US counterpart.

The Australian dollar, or Aussie, has sunk to a six-year low around $0.73 against its US counterpart and looks set to head even lower. The immediate cause is the slump in commodities: the prices of Australia's two biggest raw materials exports, iron ore and coal, have respectively fallen by 70% from their 2011 peak and by 45% since 2013.

Advertisement - Article continues below

While some analysts believe the commodities market may not be too far from a bottom, "we think the market is underestimating the knock-on effects" on Australia's economy, says Morgan Stanley.

Inflation-adjusted domestic income has taken "an unprecedented 8% hit" in the past few years, estimates the bank. The hit to national earnings is filtering through to confidence, business and consumer spending, and the labour market.

It's also hard to see how the economy can compensate for the commodity-induced weakness. Non-mining investment has disappointed thanks to years of high exchange rates and worries over global growth. The high Aussie dollar is largely responsible for the demise of the Australian car industry, which became uncompetitive compared to imports.

Consumers kept piling on debt during the global crisis, which Australia escaped largely unscathed, so household debt is now worth 130% of GDP, one of the highest levels in the world. And the already bubbly housing market is unlikely to provide much additional momentum.

The upshot is that interest rates are set to fall further from their record low of 2%. With the US economy looking solid and interest rates there set to rise soon, the Aussie will become even less appealing compared to the greenback. Morgan Stanley reckons it could dwindle to $0.64 by the end of 2016.




The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020

Has the US dollar had its day?

Soaring debt levels and the failure of America to manage the Covid-19 crisis is undermining trust in the world’s reserve currency. 
3 Jul 2020

The end of currency a tailwind for UK investors

A weak pound and strong dollar are unlikely to keep bolstering returns for British investors over the next decade.
29 Jun 2020

Is the pound really turning into an emerging-market currency?

Some analysts have suggested that sterling's volatility makes the pound "more like the Mexican peso than the US dollar". John Stepek asks whether this…
25 Jun 2020

Most Popular


House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020