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 has said that 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 what makes the Australian dollar fall.
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What brings down the Aussie dollar?
The value of the Australian dollar compared to other currency is determined by supply and demand of the Australian dollar in foreign exchange markets. This is called a floating exchange rate, the opposite of a fixed exchange rate where the central bank has a set exchange rate for foreign currency.
The rules of supply and demand work for the dollar like any other commodity. For example, an increase in foreign investment in Australia means an increase in demand for the dollar, so it therefore appreciates in value. In this case, an increase in foreign demand for Australian assets probably also means that more Australian people are choosing to hold Australian assets. Therefore, there becomes less Australian dollars in circulation in the international currency exchange markets, decreasing supply and therefore increasing the value of the dollar.
Conversely, if there is a surge in Australian investment in foreign currency, demand for the Australian dollar decreases, and the supply of Australian dollars in the currency markets increases. Both these factors mean that the dollar depreciates against international currency.
There are several factors that have contributed to the Aussie dollar's poor recent performance.
Low interest rates
It’s easy to forget after the recent cash rate hikes, but interest rates in Australia were at historic lows for much of the pandemic era. While this is a measure intended to stimulate domestic spending, it also means that Australian assets that pay interest (government bonds, for example), have a diminished yield, so foreign investors will buy less, decreasing demand for the dollar.
China/US trade war
China and the United States are our largest and third largest two way trading partners. Much of the foreign investment in Australia comes from these two superpowers, so the ongoing trade war between the two has had a ripple effect, decreasing investment and thus depreciating the dollar.
Supply chain issues
While supply chain disruptions from the pandemic was hardly a problem unique to Australia, we also had to contend with additional hits to the supply chain from the bushfires in 2019-2020, followed by the floods throughout early 2022. This affects production of goods in Australia, and thus decreases exports. Decreased exports means a decrease in the demand for the dollar, and so depreciates it in value.
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 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, 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 when the dollar is low.
At the time of writing, our Aussie dollar buys about 70 US cents. In October though, this number was just 62 cents. This means that buying something from the United States was 12% more expensive in October than it would be currently. For example, if you wanted to buy a $US1,500 laptop from an American store, it would currently cost you about $2,166AUD. Assuming the sale price of the laptop was the same in October, it would then have cost $2,419 AUD, a $252 difference.
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 be $1,050 USD, compared to $950 USD in October.
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
For Australians, the significance of the Aussie dollar's performance will vary from person to person. While it doesn’t seem like it, a weak Australian dollar can sometimes be a good thing domestically. It usually means an increase in demand for local goods, as they become less expensive relative to imported goods. This can also help our exporters, as the price of Australian goods becomes cheaper relative to other countries. For a country like Australia, where exports exceed imports, it’s perfectly plausible that a weak dollar could have a net positive impact on GDP. On the other hand, a weak dollar means that imports and trips abroad more expensive, as well a probable spike in fuel and property prices.
First published on April 2020
