The Australian dollar is around its lowest level since 2020 against the US currency, continuing its move towards 61 US cents with a sharp fall over the weekend.
Apart from the lows hit nearly five years ago during the COVID pandemic, and the global financial crisis in 2008, the last time the Aussie dollar was at these levels against the greenback was 2003.
So what’s behind the fall and how could it impact you?
How far has the Australian dollar fallen?
At the Australian share market open on Monday, the local currency was buying a full US cent less than it was the same time last week — around 61.44 US cents.
That represents a significant drop against the US currency since mid-December, when it fell from above 64 US cents to below 62 US cents in the space of a few weeks.
Over the past three months, the Aussie dollar has lost nearly 9 per cent against the greenback.
It’s a sharp decline from above 69 US cents in late September.
When compared to some currencies besides the US dollar, however, the falls haven’t been so steep.
The Reserve Bank of Australia (RBA) calculates the price of the Australian dollar in relation to a basket of foreign currencies belonging to our trading partners, known as the trade-weighted index (TWI).
Of course, the Australian dollar-US dollar exchange rate doesn’t tell the whole story.
As you can see on the dark blue line on the chart above, the TWI has weakened but not as sharply as the AUD-USD exchange rate.
Each year the RBA updates the weights of the currencies that make up the TWI based on trade levels for the previous year, so it provides an indicator of Australia’s international competitiveness.
What’s causing the Aussie dollar to fall?
The major factor behind the fall in the Australian dollar over the past few days has been a spike in the US dollar.
The greenback hit a fresh-two year high, after much stronger-than-expected employment data out of the US.
The non-farm payrolls report showed a 256,000 increase in jobs in December, around 90,000 more than forecast, and the unemployment rate improving.
Westpac economist Jameson Coombs says the strong employment data reaffirms the “US economic exceptionalism narrative”, while expectations of interest rate cuts by the US central bank decreased.
Markets are now pricing in just 29 basis points of rate cuts by the Federal Reserve by the end of the year, compared to 43 basis points before the report.
“While the strong US dollar has left no prisoners, the Aussie softness has been exacerbated by tariff angst, fears over economic growth in China and the repricing in domestic interest rate expectations,” Mr Coombs notes.
“The weight of these forces leaves little room for a significant near-term reversal for the Aussie.”
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How could a falling currency affect you?
For Australians heading overseas there will be an obvious impact from the falling exchange rates.
Your money will be worth less if you’re heading to the US in particular, so anything you pay for in US dollars will hurt more.
The Australian dollar has fallen against the Japanese yen, the Thai baht and the Indonesian rupiah to varying degrees over the last six months.
But it’s not universally bad news for travellers.
If you’re heading across the ditch, for example, the Australian dollar is buying more than 1.10 New Zealand dollars — that’s a better exchange rate than back in September.
The Aussie has pulled back against the euro in recent weeks but it’s still around levels it was at in mid-2024.
If you’re sticking within Australian borders, you may still feel the effects.
“A lower Aussie dollar is good for Australian exports (because the cost of these goods is lower for overseas buyers) but… puts upward pressure on inflation through imported products,” AMP deputy chief economist Diana Mousina explains.
So prolonged weakness in the currency could start to hit your bank account even if you don’t head on an overseas holiday, as it pushes up the prices of products from overseas.
However, Ms Mousina contends that due to the fact the trade weighted index hasn’t fall as much as the Aussie has against the US dollar, “the impact on inflation is not as worrisome”.
What has it got to do with interest rates?
Interest rates are a key driver of currency markets for a fairly simple reason — a country where your money can earn more interest is a more attractive place to park your cash.
Expectations of US rate cuts are being pushed back, while Australian interest rates are now expected to fall sooner than previously forecast, creating a further source of pressure on the exchange rate.
The RBA board next meets in mid-February and will be closely watching local unemployment figures due out this week and the all-important inflation measure, the quarterly consumer price index, to be released in the final week of January.
So expect to see the Australian dollar move in reaction to those data points and what they could mean for the timing of interest rate cuts.
What’s likely to move the Aussie dollar from here?
As with the recent moves, a lot of the Aussie dollar’s fortunes will be tied to the US.
Capital Economics is forecasting increased movement for the greenback in the near future, with inflation data due out of the US next week, as well as the inauguration of Donald Trump as US president.
“Uncertainty around the incoming Trump administration’s plans on fiscal and tariff policy as inauguration day draws nearer suggests that more volatility may lie ahead,” deputy chief markets economist Jonas Goltermann says.
The outlook for China will be another crucial factor for the Australian dollar as the Aussie is viewed by traders as a proxy for China’s economic fortunes.
This Friday will bring China’s economic growth figures for the final quarter of the year.
