Photo by Joey Csunyo on Unsplash
Photo by Joey Csunyo on Unsplash
The Australian economy has been on an extreme rollercoaster ride lately with fears of a recession amid the coronavirus pandemic.
With it, the Australian dollar has fallen sharply, tumbling as low as US57 cents at one point. So how does a weak Aussie dollar impact the everyday Australian?
The strength or weakness of the dollar can considerably impact the cost of everyday items, but research from international transfer money provider WorldFirst found many Aussies have no idea how a fluctuating dollar impacts them.
WorldFirst head of foreign exchange Patrick Liddy said understanding the impacts of a fluctuating dollar could help people save money.
“From the price we pay at the fruit shop, to our overseas hotel room, mortgage repayments and the cost of our new TV, a small difference in rates can cause a ripple effect that increases the daily cost of living,” Mr Liddy said.
Before we deep dive into the impacts of a falling dollar, let’s take a look at why the Aussie dollar is falling.
If you've been looking for a place to stash some cash, the table below displays a selection of six-month term deposits with high interest rates.
*Rates correct as at 01 August 2020. Rates based on a $50,000 deposit for 6 months.
Why is the Aussie dollar falling?
Australia’s dollar tumbled to a 17-year low on March 19 amid fears of a global coronavirus pandemic, which has since been declared by the World Health Organisation (WHO).
But the dollar was falling well before that.
In the last year or so, the Australian dollar has copped a bit of beating against major world currencies like the US dollar.
The fall began after the governor of the Reserve Bank of Australia (RBA) Philip Lowe gave a speech conceding that the Australian economy had been weaker than expected in 2018 and that rate cuts may be needed in 2019. At the time, our dollar was trading at 70.19 US cents before dipping below that. It’s never really recovered and currently (as at 2 April) sits at 61 US cents.
When the RBA went on to cut Australia’s cash rate four times, it did nothing to inspire investors to park their money here, putting further downwards pressure on the dollar.
Trade tensions between the US and China have also weighed heavily on the dollar, given our economy is closely tied in with China’s. And then we had the bushfires, the full economic impacts of which are yet to be known.
Commonwealth Bank is forecasting the Aussie dollar will potentially drop to US55c or lower.
How will a weak Aussie dollar impact me?
While a falling dollar can be a sign of a weakened economy, it can also be a good thing because it usually boosts Australia’s Gross Domestic Product (GDP). That’s because a lower dollar makes our exports cheaper which is attractive for overseas buyers because it means their foreign currency can buy them more.
Exports can include services such as tourism and education - industries which are among the main winners of a low Aussie dollar, alongside manufacturing and agriculture.
A low Aussie dollar benefits our manufacturers and farmers because they can sell more goods overseas as our exports are cheaper, which means overseas buyers can purchase more of it. A low Aussie dollar also encourages Australians to buy locally because overseas imports cost more.
The tourism sector also benefits from a lower Aussie dollar because it attracts more overseas tourists who can get more bang from their buck here. It’s also good on a domestic level, as Australians are more likely to ditch expensive international travel in favour of a cheaper holiday in the country.
The education sector also gets a bit of a boost when the dollar falls, with international students flocking to Australian universities to study because it’s cheaper for them.
But when it comes to the everyday Australian, a weak Aussie dollar may not always be such a good thing.
Your international holiday could be about to get more expensive
Unfortunately, it’s bad news if you’re heading overseas (which is unlikely anyway now that Level 4 travel restrictions are in place) because a lower dollar buys less foreign currency (especially USD) - giving you less spending capacity.
Your airfare could also be more expensive as fuel costs account for about 30% of an airline’s operating costs.
The upside is that when you come back from your trip, a lower Aussie dollar means you could get more when selling any leftover currency back.
If you are considering an international trip (after the Level 4 travel restrictions have been lifted!), there are still a few countries where the Australian dollar has a favourable exchange rate.
Buying items from overseas will cost you more
If you’re buying something from overseas, be prepared to pay a lot more for it.
At the time of writing, our Aussie dollar only buys 61 US cents. A year ago it was buying 71 US cents, representing a 10 cent drop. Theoretically, this means things in the US could cost you 16% more than a year ago. For example, if you wanted to buy a $US1,500 laptop from an American store, it could’ve cost you $AUD2,113 when the AUD was buying 71 US cents. Assuming the sale price of the laptop has remained the same, with the AUD buying 61 US cents, it would now set you back $AUD2,459. That’s $AUD346 more expensive!
On the other hand, if it was someone from America wanting to buy a $AUD1,500 laptop from an Australian store, the price of the laptop in US dollars would now only be $US915, down from $US1,065, saving them $USD150.
Imported goods are more expensive
The cost of imported goods (like electronics) rises when our dollar is lower. When the Australian dollar falls, overseas imports become more expensive.
The upside of that is demand will begin to favour locally-made products, which is good for Australian businesses.
Petrol prices could rise
Fuel prices are influenced by many factors, including the value of the Australian dollar relative to the US dollar.
Because oil barrels are bought and sold in US currency, a drop in the Aussie dollar relative to the USD can hike up the price of fuel. Other factors that can contribute to the price of fuel include distributing and shipping costs, wholesaling and refining.
But don’t expect fuel prices to drop every time the AUD is higher the US dollar. Generally, this only happens if the benchmark price stays the same or drops, and also depends on other local factors.
Pushes up property prices
A lower dollar means that Australia becomes an increasingly attractive option for overseas investors looking to purchase a property because their foreign currency can buy them more.
As more foreign investors flock to our shores to purchase property, house prices are pushed up and Australian buyers can find themselves priced out of the market.
Savings.com.au’s two cents
While a weaker Australian dollar can sometimes give the economy a bit of a boost because of increased demand for locally made goods, the current coronavirus pandemic means that most of the benefits we’d normally expect to see will be dead in the water.
Strict travel restrictions that have seen international flights grounded indefinitely means that our tourism sector is extremely unlikely to benefit from the low Aussie dollar at all. It’s a similar story for the education sector.
The struggling Aussie dollar is also set to hurt the already struggling retail sector because it heavily relies on importing goods from overseas.
In ordinary times, a falling Aussie dollar can sometimes be a good thing. But in these unprecedented times, the rapid speed of the falling dollar means that any economic growth is unlikely.
- Housing finance rebounds in June after fall in May
- SUVs, utes increase marketshare as new car sales dwindle
- End of lease cleaning: Do you need a professional to get your bond back?
- RBA holds cash rate at 0.25% for August
- Retail sales climb 2.7% in June