The Aussie dollar has hit a five-year low. Here’s what it means for you

The Australian dollar is fetching about US61¢ – its lowest levels against the greenback since the start of the pandemic – potentially delivering the federal government a boost to its bottom line in an election year.

But while consumers are facing higher costs for some overseas travel and imports such as petrol and appliances, economists say the Aussie dollar’s fall would need to be sharper and longer to raise alarm bells for the Reserve Bank in its inflation fight.

Recent weakness in the Australian dollar has been attributed to factors including a weak Chinese economy and the threat of tariffs under Donald Trump.Credit: iStock

The exchange rate (the value of one currency compared with others) is constantly fluctuating, but the Australian dollar has hovered below US70¢ for most of the past two years. Since late September, it has dropped from US69.32¢ to be trading at US61.34¢ just after 4pm.

So, why is it weakening, what does it mean for inflation, and how does it affect the government as it heads towards an election?

Why is the Australian dollar falling?

The value of the Australian dollar is determined by demand and supply on the foreign exchange market. When demand exceeds supply, the value of the Australian dollar rises and vice versa.

The recent weakness has been attributed to several factors: a weak Chinese economy, the threat of tariffs under incoming US president Donald Trump that could further harm Australia’s largest trading partner, and the US Federal Reserve signalling that fewer rate cuts are likely in 2025 than initially expected.

Australia is heavily reliant on mining exports, meaning commodity prices and the economic strength of our biggest trading partners can swing demand for our currency.

At the same time, Australian interest rates are already lower than US interest rates, which makes depositing money here less attractive for international investors (therefore driving down demand for – and the value of – the Australian dollar).

AMP chief economist Shane Oliver says these factors have “come together in the perfect storm for the Aussie dollar”.

What does that mean for inflation?

A weaker Australian dollar can be inflationary in that it increases the cost of imports and can drive up overseas demand for everything from local property to tourism.

But Deloitte Access Economics partner Stephen Smith says imports comprise only about 20 per cent of Australian consumption.

“We typically need to see a larger and probably more sustained fall in the exchange rate to have any really meaningful effect on inflation,” he says.

ANZ economist Madeline Dunk says the inflationary impact of a weaker Australian dollar is unlikely to be raising alarm bells for the Reserve Bank. In a 2011 paper, the RBA found a 10 per cent stronger Australian dollar was likely to decrease consumer prices by only 1 per cent over about three years.

“Right now, I think the RBA feels reasonably comfortable about the inflation path that the economy is on,” she says.

Dunk also notes the Aussie dollar is holding up against other currencies that are more consequential to the Australian economy such as the Chinese yuan. In trade-weighted index (TWI) terms – a measure that compares the Aussie dollar to a basket of currencies weighted according to the amount of trade done with them – the local dollar has softened, but not as much as against the US dollar.

How will it affect the election and budget?

A weaker Australian dollar can boost the government’s financial position by lifting tax revenues as iron ore and coal – two of the nation’s biggest exports – are priced in US dollars.

“The weaker Australian dollar is actually very good for mining company profits and therefore company tax receipts,” Smith says.

At a press conference on Monday, Finance Minister Katy Gallagher said the government had been working to get the budget in better shape, including lowering its interest bill by about $70 billion.

“The budget bottom line is in much better shape than the one that we inherited, and we’ll keep working away at it,” she said.

While the potential inflationary effects may be a concern for a government determined to drive home the message that it is delivering cost-of-living relief, higher tax revenues will be a boon for its next budget update in March.

However, Smith warns that any rise in inflation can also increase government spending on areas indexed to the consumer price index such as social security payments.

Will it influence house prices?

A weaker Australian dollar can put upward pressure on the housing market by making it cheaper for overseas buyers to purchase local properties.

But Smith and Dunk both say the impact of foreign investment on house prices is likely to be very slight.

“The share of foreign buyers in the housing market is pretty small,” Smith says, noting the bigger impact could be from the increased cost of construction materials, many of which are imported.

Can the government do anything about it?

Because our money supply is controlled by the independent Reserve Bank, there’s not much the government can – or, according to Smith, should – do to change the value of the Australian dollar.

Since 1983, Australia has had a “floating” exchange rate, which allows it to fluctuate in response to market events.

Smith says this allows the country to pursue an inflation target and encourages Australian businesses to become more productive and compete in the global economy. It also helps insulate the Australian economy against global shocks, helping to promote stability.

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