Australian dollar weakens as the world worries

Overseas bank collapses and rescue packages are bad news for the Australian dollar, but a China-led recovery may be in the pipeline.

The Australian dollar has dropped sharply since early February. Picture: iStock

Rising global financial worries have piled pressure onto the Australian dollar, which has dropped 7 per cent in value against the US dollar since early February.

Banking turmoil in the US and Europe has shaken world financial markets, and economists say this creates negative global sentiment that typically hurts our dollar, one of the world’s six most-traded currencies.

Commonwealth Bank economists warned on Friday that the dollar could sink below US60c, but others expect a rebound in the coming months thanks to an improving Chinese economy.

HSBC chief economist Paul Bloxham said Australia’s dollar traditionally struggled in a “global risk-off environment”.

“When everyone is worried about the global economy, and right now the focus is on banking systems in western countries, typically the Australian dollar is sold off,” he said.

HSBC chief economist Paul Bloxham says an Aussie dollar rebound looks likely.

The Australian dollar also has weakened against other major currencies including Japanese yen, euro, British pound, Chinese renminbi and Canadian dollar.

But its outlook was positive, Mr Bloxham said.

“As China’s economy opens, that is going to be quite good for growth in China, and that tends to provide support for the Aussie dollar,” he said.

HSBC expected the dollar to rise towards US76c later this year, “a long way away from where it is right now”, Mr Bloxham said.

AMP chief economist Shane Oliver also sees a brighter outlook, forecasting our dollar to rise to US70c-US75c by December.

Dr Oliver said if the overseas banking problems caused a global slowdown it could lead to less demand for Australian exports and more currency pressure in the short term.

“I think the Aussie dollar will recover, but we have to see some of the dust settle first,” he said.

“Our currency is a good gauge of global sentiment … obviously the bank worries are feeding into it.

“The Aussie dollar is called a risk-on currency and is very sensitive to the global growth outlook. It was down last year when investors were lacking in confidence.”

Between October 2022 and February 2023 it surged from US62c to US72c – a boon for Australians heading overseas for their holidays – but it has been all downhill since.

A weaker dollar can impact inflation at home by increasing import prices, a factor that the Reserve Bank examines when setting interest rates. Demand for Aussie dollars drop when US interest rates are significantly higher than Australian rates, but Dr Oliver said the imported inflation link was not as strong as it used to be.

AMP’s Shane Oliver says our currency reflects global sentiment. Picture: Supplied

“At the moment it hasn’t come down enough to get too concerned,” he said.

Mr Bloxham agreed, saying the impact of foreign exchange rate on inflation was “quite weak”.

“It’s not the first-order consideration for the RBA,” he said.

“They are watching those global financial developments, and that I think will play a key role in what they do next month.

“We think they will remain on hold next month.”

Originally published as Australian dollar weakens as the world worries