Finance Finance News Why the Aussie dollar continues to struggle despite a growing economy

Why the Aussie dollar continues to struggle despite a growing economy

Australian dollar fall
It didn't take much for the Reserve Bank Governor to cheapen the Australian dollar. Photo: Getty
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The Aussie dollar’s current exchange rate won’t make life easier for those planning an overseas trip, but economists say the currency’s weak performance is bolstering the local economy.

A combination of Australia’s low official interest rates and US Federal Reserve rate hikes mean that the Aussie battler will likely continue to struggle against its US counterpart.

The dollar hit a high of 72 cents against the greenback on Wednesday afternoon on the back of newly released GDP figures, before trickling back down to just over 71 cents.

The figures showed Australia’s economy exceeding market expectations by growing 0.9 per cent in the June quarter, and 3.4 per cent over the past 12 months.

Newly-appointed treasurer Josh Frydenberg revelled in the news, telling the press pack in Canberra that it was the fastest rate of growth since “the height of the mining boom” in September 2012.

The figures “highlight the strength and the resilience of the Australian economy”, which is in its 27th year of consecutive economic growth, Mr Frydenberg said.

It’s a different story for the dollar, however, which has steadily declined since peaking at just over 80 US cents in January.

While international market forces—chiefly the US Federal Reserve steadily raising rates and a greenback that’s appreciating against most major currencies—have largely determined the dollar’s performance, local factors also came into play.

Monash University macroeconomist Mark Crosby said that the Aussie dollar would normally have been expected to “have a bit of a bump” after such positive GDP news.

Australia’s low official cash rate—which the Reserve Bank kept on hold at 1.5 per cent for a record 23rd meeting on Tuesday—is partly to blame for the weak dollar, Professor Crosby said.

“Because the RBA’s not expected to move [interest rates up] despite these strong GDP numbers, any bump will be small and not last very long,” he said.

Falling home prices and rising concern around the significant number of over-leveraged households that will struggle to meet mortgage payments if banks push lending rates up are expected to stop the RBA from raising official interest rates through 2018 and into 2019.

“The RBA shouldn’t have cut rates the last two times [in May and August 2016]. It wasn’t necessary and it’s put them in a tricky place,” Professor Crosby said.

“They need to raise rates but they have virtually no room to move if things go pear shaped.”

The RBA is partly responsible for both the unsustainable housing price boom and the low dollar, Professor Crosby said.

“They ought to be a bit more proactive in moving rates up to at least 2 to 3 per cent over a period of time so they have more room to move,” he said.

“Part of the reason why asset prices are so distorted is that we’re at 1.5 per cent.”

While the GDP figures appear to show that Australia’s economy is moving along nicely, the positive growth is largely due to high level of consumer spending, and a low household savings rate, Professor Crosby said.

“Households are spending everything they earn, but that can’t continue,” he said.

University of Queensland School of Economics head Philip Bodman said the low Aussie dollar is “a story around the strength of other currencies as opposed to weakness in ours”.

“Interest rates are at record lows and there’s not so much of a prospect of them rising,” Professor Bodman said.

While those looking to travel abroad may grimace at the Aussie’s poor exchange rates, the low dollar is helping to bolster “very large” parts of Australia’s economy including trade, tourism, insurance, and education sectors.

The dollar’s current level is a “natural place for it to be at the moment”, Professor Bodman said.

Importers do “tend to struggle” when the dollar is low, however the impact on consumers looking to buy tech products and other imported may be delayed, he said.

“Big retailers tend to buffer against those movements, so consumers don’t see an immediate impact.”