Australian dollar plunges to a 26-month low: Here’s what it means for your wallet and mortgage

The Australian dollar is under pressure after falling below 62 US cents for the first time in more than two years.

The Australian bought 62.11 US cents on Friday afternoon, about where it was trading last week, after falling to 61.83 US cents early on Thursday.

Except for three days in October 2022, the Aussie has not been below 62 US cents since late March and early April 2020 – the first time the rate has been this low since 2008, during the global financial crisis.

The level on Friday is still 10 percent lower than at the beginning of October, when the Australian bought more than 69 dollar cents.

The decline was more a matter of US dollar strength than Australian dollar weakness, with the dollar rising 7.6 percent to a 26-month high against a basket of six other currencies in that period .

Donald Trump’s victory in the US presidential election and his promised policies of tax cuts, higher spending and tariffs have led to a more cautious outlook for US interest rate cuts for 2025, with fewer expected rate cuts than previously forecast.

IG analyst Tony Sycamore said Trump is likely to impose tariffs on imports, which would dampen growth expectations outside the US and weigh on commodity prices.

The Australian and New Zealand dollars were particularly vulnerable to the risks of Chinese tariffs, he said.

A mild rate change by the Reserve Bank in December, following the release of lackluster third-quarter gross domestic product data, has also put pressure on the Australian dollar as interest rate differentials play a major role in determining the currency’s value.

Mr Sycamore said the Australian had priced in a lot of bad news in a short space of time and could recover from here if the price stayed above 61.70 from October 2022.

If that support level is breached, it would pave the way for a decline to 60 cents, he said.

A weaker Australian dollar would make US holidays more expensive and raise the price of imported goods including petrol and vehicles.

“Buying products from abroad is becoming more expensive, perhaps unaffordable, while holidays abroad are also becoming more expensive,” Capital.com analyst Kyle Rodda told News.com.au

However, it would also make Australian exports more competitive and the country a more attractive tourist destination.

“On the other hand, our exporters are benefiting from the falling prices associated with a lower Australian dollar. While some domestic tourism may benefit from the fact that people are more likely to travel here – have all Americans noticed lately? – and Aussies go on holiday locally more often.’

AMP Chief Economist Shane Oliver warned that if the dollar continues to fall it could lead to continued inflation

No major banks have changed their forecasts for rate cuts in 2025, despite the currency’s decline.

But AMP chief economist Shane Oliver warned that if the dollar continues to fall it could impact the Reserve Bank’s next interest rate decision.

“Imports account for between 10 and 15 percent of the consumer price index, so it could have a significant impact,” Dr. Oliver to Newswire.

“It means that every 10 percent decline in the Australian dollar adds 0.1 to 0.15 percent to inflation.

“If rates continue to fall from here – say 20 per cent since early 2024 – this could impact the RBA’s decision.”

Mr Roudda warned that the AUD would reverse its downward trajectory; Australia should see a moderation in US growth and an increase in Chinese economic activity.

Without both, it will be difficult for the AUD/USD to rise meaningfully. Conversely, if Trump leads to a rise in inflation and higher than expected interest rates in the US, and the trade war really hits China hard, AUD/USD could fall below 60 cents.”