‘Buckle up’: Aussie dollar plummets as US-China trade war lets rip

The Australian dollar has fallen to its lowest point in five years as a trade war between the country’s largest economic partners – China and the United States – reaches a fever pitch.

Trading at just US59.33¢ on Monday morning, the dollar recovered to just over US60¢ by the afternoon as expectations rose of further instability in a trade war sparked by Donald Trump’s “Liberation Day” tariffs.

On Friday, China slapped a uniform 34 per cent tariff on US imports, spooking the Australian market and lowering the dollar to levels not seen since the global financial crisis and the COVID-19 pandemic.

Why is the Australian dollar falling?

Rodrigo Catril, senior foreign exchange strategist at NAB, said that the Australian dollar is “in no man’s land” as trade tensions between the US and China become more volatile. Catril said that the risks of a “systemic shock” caused by trade tensions was increasing, and that the dollar “never performs well” in such circumstances.

Catril said that there was some room for optimism, but a “true to form” Trump administration could bring about an expanded trade war with China in which markets could “get a little bit worse before they get better. We need to buckle up and brace for a little bit of volatility.”

As major international players such as the European Union plan to respond to Trump’s tariffs, a broadening of tactics is expected.

“The scope of tariffs is probably a bit narrow – we really should probably be talking about trade tensions … that’s where we can talk about tariffs on services, or restrictions to sectors, or financial access and so on,” said Catril.

“The general sense is that Europe is, at the moment, more inclined to negotiate first and then look to retaliate afterwards if negotiations fail,” said Catril. “Europe is talking about the idea of imposing tariffs on services, which of course is where big tech in the US has quite a bit of exposure to Europe.”

How does it compare to the US dollar?

The Australian dollar was trading in the high US70¢ throughout the first half of 2021 but has steadily depreciated. The current low has been replicated in two other periods over the past 20 years – during the global financial crisis in October 2008, and at the beginning of the pandemic in March and April 2020. By Monday afternoon the Australian dollar had just scratched back over US60¢.

How will this affect Australian consumers?

Diana Mousina, deputy chief economist at AMP, said today’s drop was not completely surprising coming off US tariff announcements, which she said were “worse than the market was expecting”.

Those travelling overseas, buying goods from international suppliers, and importers were likely to feel the hit to the dollar the hardest, said Mousina.

Since April 1, the dollar has fallen against the currencies of the most popular travel destinations for Australians. The biggest drop in that group came against the Japanese yen, with a fall of 6.42 per cent.

The British pound and the Chinese yuan will also be further out of reach for travellers, each dropping by around 4 per cent.

“Things are going to, unfortunately, be more expensive overseas, which isn’t great because it already costs a lot to travel overseas for Australians,” said Mousina.

Will it go back up again?

Mousina expects the dollar to rise again once the “dust settles” from a tumultuous market, forecasting a climb to around US70¢ over the next two years. She said the fall in the dollar would probably boost Australia’s export market, but gains may be offset by inflated imports.

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