The lowdown on the dollar

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The Australian dollar has fallen substantially since the beginning of September, and was hovering around US$0.81 today, close to its lowest level since June 2010, or in four and half years. 

Since September, it has fallen around 13 cents from US94c to around US81c this morning (down 12.7% since the start of September, and down 8.5% since start of year). 

The Aussie dollar is down substantially from 2011 and 2012, where the currency sat above $US1 for most of the period and peaked at $US1.10 in July 2011. 

 

Reasons for recent depreciation

Much of the recent fall in the Australian dollar is owed to a stronger US economy and the Federal Reserve’s tightening of monetary policy from the loose policy that had been in place post-GFC.

But our currency has also fallen against other currencies, owing to the declining terms of trade.

 

The Aussie dollar has fallen against the trade-weighted index, a weighted average of a basket of our major trading partners currencies, although not as much as the fall against the US dollar. It is down 8.6% against the TWI since the start of September (or down -4.2% since the start of the year). Within the TWI, the Aussie has been broadly stable against the yen and euro over the year, but has fallen against the pound, the Korean won and Chinese renminbi (floating peg to USD). 

The Reserve Bank Governor Glenn Stevens says the Aussie dollar needs to fall further, and is recently on the record saying US75c would be ideal. This is in line with the post-float average of US76c since the December 1983 float. 

 

Economic consequences

We expect the lower dollar to benefit domestic producers competing against imports or selling into export markets. However, some producers, including many manufacturers, who adjusted their business models to protect themselves from the high dollar – by importing components for example – also reduced their exposure to the benefits of a falling currency. For these domestic producers it will be a case of delayed gratification as they readjust to the lower currency.

Importers, however (including retailers and wholesalers with import functions), will suffer detriments. Usually, a depreciation in the Australian dollar would hit industry and consumers through higher fuel prices. But at the moment the depreciation in the Aussie dollar is coinciding with an offsetting falls in global oil prices. These are both positive developments for industry and households and, if sustained, will spur demand in to 2015.

Read more about this subject and other recent data and economic developments in this week’s Ai Group Economics Weekly Update

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Pip Freebairn
Pip joined Ai Group as a Senior Policy Adviser in 2013. She has broad experience covering economics and public policy, having worked as an economist for the Reserve Bank and Macquarie Bank, as a journalist at the Australian Financial Review in the Canberra Press Gallery, as well as advising a Federal Treasurer. She has a first-class honours degree in Economics and an Arts degree from UNSW.
Pip Freebairn

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