Petrol prices and interest rate cuts at risk as dollar hits record low

US President-elect Donald Trump’s America-first policies and a weakened Chinese economy have pushed the Australian dollar to its lowest price in more than two years, raising concerns of delayed interest rate cuts and increased petrol prices in 2025.

The Australian dollar fell to US61.88¢ on Wednesday, a price not seen since October 2022. While it had a slight recovery on Thursday, trading at US62.16¢ as of 4.48pm AEDT, the currency has been under sustained pressure over the past couple of months.

Meanwhile, miners and energy stocks pushed the Australian sharemarket into the green on the first trading day of 2025, with the S&P/ASX 200 rose 42.1 points, or 0.5 per cent, to 8201.2 points.

The Australian dollar hit a two-year low this week. Credit: Louie Douvis

The development comes less than three weeks before Trump’s second inauguration on January 20, and follows a sell-off of the Chinese yuan as traders grow nervous of President Xi Jinping’s plans to revive an ailing economy.

AMP chief economist Shane Oliver said downward pressure on the Australian dollar had started in mid-December, when the US Federal Reserve signalled fewer rate cuts in 2025 than initially expected, pairing with uncertainty about the US and China.

“It’s come together in the perfect storm for the Aussie dollar,” Oliver said. “It’s at the bottom of the range it’s been in for the past few years.”

IG market analyst Tony Sycamore said the prospect of US tariffs and an uncertain Chinese economy had led to a decline directly from the “playbook of the Aussie dollar”.

“The threat of tariffs is most directly aimed at China, and China being our biggest trading partner isn’t a good thing,” Sycamore said. “There’s concern Trump will run the economy hot, and maybe too hot.”

AMP chief economist Shane Oliver said a decline in the Australian dollar started when the US Federal Reserve signalled fewer rate cuts for 2025 than initially expected.Credit: Peter Rae

Further hits to the dollar, especially below the 60¢ mark, could also compel the Reserve Bank to reconsider the timing of interest rate cuts, which are forecast to occur as soon as next month.

Josh Gilbert, market analyst at eToro, said the Australian dollar’s latest decline would give “something for the RBA and Michele Bullock to think about”.

Reserve Bank governor Michele Bullock will preside over the board’s next meeting, ending on February 6.Credit: Oscar Colman

“We haven’t seen enough weakness to rule out a rate cut, but it will be a consideration,” Gilbert said.

“We’ve had such a strong run, and the biggest thing for me is the expectation to have a bit more strength from the Aussie dollar … given how sharp we’ve seen the price come off, it might be a greater consideration.”

While weakened, the Australian dollar remains stronger than the currencies of several of its trading partners, which is expected to give the RBA confidence as it moves forward with monetary policies to return inflation to its target band. The RBA will be predominantly guided by December inflation numbers at its February meeting, rather than global currency movement.

There’s no guarantee that the RBA would view a declining Australian dollar as an impediment to cutting interest rates.

Oliver said the RBA would be required to “assess the context” in which the dollar was sliding, likening it to the decision to cut interest rates at the start of the pandemic while the dollar fell to record lows.

“It’s not clear to me that even in the circumstances of a bigger fall that it would stop the RBA from cutting,” Oliver said.

“It’s sort of a messy situation, but I don’t see it leading to the RBA cutting rates – but I do think it could influence their thinking.”

Sycamore said further losses to the dollar would point towards a “likely rise” in Australian petrol prices as its purchasing power against the international benchmark price weakened.

“Inflation is coming from domestic inflation, or services inflation, and that isn’t really influenced by the Aussie going higher or lower,” Sycamore said. “We still don’t know the outcome of what Trump’s tariffs will be, and won’t know until January 20 or the days after that.”

Chinese President Xi Jinping delivers his New Year message.Credit: AP

A weakened Chinese economy, hampered by an extended property market downturn and falling consumer confidence, is expected to face further challenges this year as its prosperous export trade faces new tariffs under the Trump administration.

Growing unease about the world’s second-largest economy was observed following Xi’s annual New Year’s Eve national address, which spurred a sell-off of the Chinese yuan despite Xi’s assurance that China would meet its expansion and economic growth targets in 2025.

In a televised address, Xi acknowledged the “challenges of uncertainties in the external environment” that the Chinese economy would face this year, while assuring viewers that “we can prevail with our hard work”.

China is expected to bring in more stimulus packages this year after their introduction in September as part of a bid to supercharge the country’s slowing growth. Beijing is expected to continue adding stimulus until it sees signs of economic recovery, though it’s unclear when the packages will be announced and what exactly they will provide.

“Xi has recommitted to fiscal stimulus, and wants growth around 5 per cent, but there’s just a lack of concrete announcements about how they will stimulate the economy,” Oliver said.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.