Australian dollar drops below 62 US cents, raising concerns for economy

Australian dollar drops below 62 US cents, impacting travel, interest rates, and economy.

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The Australian dollar has experienced a significant decline, dipping below 62 US cents on Wednesday and reaching a low of 61.84 US cents on Thursday morning.

Despite a slight recovery on Friday, the currency has been on a steady downward trajectory since September 2024 when it stood at 69.32 US cents. This marks the first time the Australian dollar has dropped below 62 US cents since 2022.

Economists attribute the weakening of the Australian dollar to a combination of a strong US dollar and instability in the Chinese economy. The US dollar has gained strength in recent weeks, aided by a Federal Reserve interest rate cut.

Meanwhile, the value of the Australian dollar is heavily influenced by commodity prices, which are tied to China’s economic performance. Independent economist Nicki Hutley explained that if China’s economy is weak, Australia’s export demand also falters.

For travelers, the weaker Australian dollar means higher costs, particularly against currencies like the British pound.

On Thursday, the Australian dollar bought just 0.49 pence. Hutley advises travelers to use currency conversion tools to manage spending and avoid unexpected costs, especially when using credit cards abroad.

The weak dollar could also impact interest rates in Australia. The Reserve Bank of Australia (RBA) is closely monitoring inflationary pressures caused by the weaker currency, though the exact effects on interest rates remain uncertain.

In December, the RBA indicated the possibility of a rate cut in February, but economists, including Sean Callow from InTouch Capital Markets, suggested that the weak dollar may raise concerns about inflation, potentially influencing the RBA's decision.

Hutley noted that while the RBA might have already factored in the weaker dollar when discussing its plans in late 2024, the competitiveness of Australian exports could offset some inflationary effects.

However, continued weakness in the Australian dollar and possible global shifts, such as changes in US interest rates, could complicate rate cut decisions.

Looking ahead to 2025, there are concerns that external factors could continue to pressure the Australian dollar.

The incoming US administration under President-elect Donald Trump has threatened to increase tariffs on Chinese imports, which could weaken the Chinese economy further and put additional strain on the Australian dollar. If the tariffs rise as expected, analysts predict the Australian dollar could fall below 60 US cents.

The fate of the Australian dollar will depend largely on the developments following Trump’s inauguration on January 20.

While the outlook remains uncertain, Hutley cautioned that the situation is still volatile. Though the Australian economy may begin to stabilize, challenges such as global economic shifts and rising tariffs could continue to create risks for the currency and the broader economy in 2025.