The Australian dollar has fallen to its lowest levels against the US dollar since 2020, trading near 61 US cents.
Beyond the pandemic-related lows, the currency has not reached these levels since the global financial crisis in 2008 and briefly in 2003.
Extent of the decline
As of Monday, the Australian dollar opened at 61.44 US cents, down one cent from the same time last week.
Over the past three months, it has fallen nearly 9% against the greenback, marking a sharp drop from above 69 US cents in late September.
While the Australian dollar has weakened significantly against the US dollar, its performance relative to other currencies in the trade-weighted index (TWI) has been less severe.
The TWI provides a broader measure of the currency’s international competitiveness, with weights adjusted annually based on trade activity.
Why is this happening?
The decline has been primarily driven by the strength of the US dollar, which hit a two-year high following stronger-than-expected US jobs data.
December’s non-farm payroll report revealed 256,000 new jobs, significantly above forecasts, and an improved unemployment rate, reinforcing expectations of a cautious Federal Reserve approach to interest rate cuts.
Domestically, factors such as a weak Chinese economy, trade concerns and a subdued outlook for key Australian exports have compounded downward pressure on the currency.
Additionally, expectations of Australian interest rate cuts in the near term have created a divergence with US monetary policy, further weighing on the exchange rate.
Outlook
The Australian dollar’s trajectory will depend on upcoming data, including domestic unemployment and inflation figures, as well as global developments.
Of course, the dollar is firmly pegged to Chinese fortunes, with the Aussie often viewed as a proxy for Chinese economic conditions.
With global economic uncertainties persisting and the US dollar maintaining its strength, the Australian dollar is expected to remain under pressure in the near term, potentially testing multi-decade lows.