The Australian dollar has been dragged back to its lowest levels since the pandemic as tariff fears grip global financial markets.
On Wednesday morning, the Aussie dollar dipped as low as 59.15 US cents — its weakest point since March 26, 2020.
It’s also lower against other major currencies.
Currency analysts say the latest depreciation is related to fears around China’s economy, given it’s Australia’s largest trading partner.
“The potential for a whopping 104 per cent tariff on China’s exports to the US is a headwind for AUD because China is Australia’s largest trading partner,” Commonwealth Bank economists noted.
“Talks are underway with Japan, South Korea and Italy to negotiate lower tariffs.”
InTouch senior FX strategist Sean Callow told ABC News that yesterday’s recovery for the currency was punctured by the renewed focus on China, ahead of the scheduled 2pm AEST implementation of the Trump administration’s tariffs.
“The US-China tariff war is also stoking concern over whether China will allow the yuan to devalue.”If it does, it will cause mayhem, including for the Aussie dollar,”
he said.
China’s yuan fell to its weakest level since 2023 on Tuesday, with analysts noting the country’s central bank was loosening its grip on the currency to counteract the blow to its exports.
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Aussie last below $US0.60 for sustained period in early-2000s
The Australian dollar spent only around week below 60 cents in March 2020, amid the global pandemic panic.
“For anyone planning a trip to the US, the more relevant time period is 2002-2003 — the last time the Aussie dollar’s purchasing power against the US dollar was so weak,”
Mr Callow noted.
The Australian dollar is also considered a so-called commodities currency — that is, its value is derived from the performance of commodities, which all fell heavily overnight.
Crude oil prices fell 2 per cent, while Iron ore also dropped 2 per cent to sit at $US97.44 a tonne.
But perhaps the biggest longer-term driver of the Australian dollar is local expectations for the direction of interest rates.
AMP economists say the longer tariff confusion and fears persist, the more aggressive the Reserve Bank will need to be in its monetary policy.
“When considering where interest rates will settle, it can be useful to consider Australia’s ‘neutral’ interest rate which is the level of the cash rate that will ‘neither stimulate not restrain demand’ (according to the RBA),” AMP’s deputy chief economist Diana Mousina said.
“According to recent RBA estimates and subsequent analysis done by CBA, this is somewhere around 2.9 per cent, which is down from prior estimates of 3.5 per cent.”
Ms Mousina said the current level of the cash rate, at 4.1 per cent, remains “restrictive” for the Australian economy.
“It does not mean that interest rates will settle at the level of the neutral cash rate, it just means that interest rates do have further to fall from here, to move out of being highly restrictive for the economy.
AMP has forecast 0.25 percentage point rate cuts in both May and August this year and expects the cash rate to end 2025 at 3.6 per cent, before eventually declining to 3.1 per cent next year.
“But, if the hit to Australian growth and financial markets is larger than expected from US and reciprocal tariffs, we may see a faster and more aggressive cutting cycle this year.“
Ms Mousina sees the potential for four more rate cuts this year alone and said a half a percentage point cut can’t be ruled out at the May meeting, “as a form of insurance against any recession risks.”
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China stimulus could prompt lift in Aussie
Analysts though say if China responds to tariff threats by injecting huge amounts of stimulus into its economy, the Australian dollar may lift against the major currencies.
“The impacts on China and Australia will be lessened if the Chinese authorities ramp up policy stimulus,”
CBA economists said.
At 11am AEST the Australian dollar had recovered to around 59.6 US cents.
Indeed, Deutsche Bank currency strategists believe this morning’s Australian dollar sell-off was “excessive”.
Deutsche Bank currency strategist Lachlan Dynan told ABC News the Aussie’s weakness is “hard to square” against the fact Asian economies that are similarly or more exposed to China — with many also facing direct US tariffs averaging 20 percentage points higher than Australia.
“The trade intensity of the [Australian] economy is also a lot less than many peers, and we think the domestic economy has evolved more independently of China’s in recent years.
“How you enter a period of turbulence is often important in dictating how you emerge.
“Australia’s economy is broadly healthy, the economy is less dependent on global capital inflows compared to the past, and the federal government has ample fiscal space to help offset the hit to growth and sentiment should that be required,” Mr Dynan said.
