The Australian dollar has fallen to a 17 year low, hitting US $0.5588 on Thursday, the weakest level since October 2002. The depreciation was largely in response to both the RBA’s expansionary cash rate decision and the announcement of a major stimulus package by the US government, which saw the dollar weaken against a much firmer greenback. As Australia’s currency has typically been denoted as a ‘commodity currency’, high levels of uncertainty surrounding ongoing supply chain disruptions have further fuelled the volatility of the dollar, affecting various domestic stakeholders.
While a weaker dollar tends to improve export competitiveness, demand for Australia’s service exports in particular have been shelved due to the coronavirus pandemic. Specifically, tourism and education have taken the largest hit due to travel bans, blunting the benefits of a low dollar. In addition, lower purchasing power for domestic importers will only worsen the struggling retail sector, which rely heavily on importing goods.
Analysts have identified further risks that may see the dollar continue to depreciate, despite a temporary rebound across the past week. Downward pressure on commodity prices, especially in oil, is likely to amplify the trade shock, as well as threaten a deflationary spiral alongside weak wage growth and rising unemployment in the Australian economy. With investor sentiment remaining broadly risk-averse, the dollar is unlikely to receive some much needed resuscitation at least in the short-term.
