Aussie dollar slump brings travellers pain and gain, but builds pressure on inflation and interest rates

The Aussie dollar is slumping, creating winners and losers as well as the possibility of interest rates staying higher for longer.

At the start of the year one Australian dollar would buy you US 71-cents.

But it’s down 9 per cent from then against the key benchmark currency, to sit just above US 64-cents.

Commonwealth Bank currency strategist Kristina Clifton is among those who think it could fall far lower.

“So the Aussie dollar has weakened this year, if we just think back to mid July, when it was at its recent peak has actually fallen about four and a half cents against the US dollar,” she says.

“We’re now seeing a risk that it can potentially fall below (US) 60-cents in the near term”.

Woman in pink blazer looks off camera

Kristina Clifton says the fall of the Australian dollar has happened faster than expected.(ABC News: John Gunn)

That type of fall has impact … everywhere.

Walking on

In the narrow laneways of Melbourne, Fiona Sweetman is leading a tour of international tourists — most of them from North America.

A Melbourne laneway in wet weather.

Hosier Lane is one of Melbourne’s top tourist attractions.(ABC News: Danielle Bonica)

A falling dollar increases the purchasing power of foreign tourists, making their money more ‘valuable’ than it was previously. 

That, in turn, influences their decisions on where they will travel and can make Australia a more attractive destination.

“The changing dollar has a huge impact for us,” Ms Sweetman says.

“The exchange rate really makes an impact for the North American market, which is the biggest (segment of) our business. And so they are coming in droves, which is great.”

Seattle’s Lorelea Hudson was already committed to this trip — so she could attend the Women’s World Cup — but the way the US dollar has strengthened against the Australian currency has changed her spending.

“It makes it a lot easier to buy things that we weren’t going to buy, like jewellery and things, so a lot cheaper.”

“We haven’t really worried about money as much because the exchange rate is so good for us. So we’re always going. ‘Oh, that’s not so expensive.'”

The flip side is that Australians heading overseas get less for their money.

At Sydney Airport, departing Australian Joel Horton is off to Honolulu and he says the situation will make him think twice before splashing cash overseas. 

“It definitely makes you second-guess and have a think about how much you’re spending over there and the luxuries, compared to being back here at home in Australia,” Mr Horton said.

Mr Horton is looking forward to some “beach time” and eating fish tacos, but he suggests he’ll economise by attending “happy hours”.


China’s struggles a problem

The issue is much bigger than travellers and even broader than the performance of the local dollar against the US currency, the “greenback”.

Our currency is lower on a “trade-weighted basis”, falling in strength against the currencies that we do most of our trade with.

“Australia trades with lots of different economies out there in the world. We can have a look at our exchange rates, weighted by how much we trade with each of the economies,” Ms Clifton said.

A large truck carrying iron ore drives up a hill

China’s reliance on Australian iron ore has been a big boost to our country but China’s economy is currently struggling.(ABC News: Michelle Stanley)

“We trade a lot with China. So our currency against the Chinese currency has quite a big weighting, but we can add up all the all the different countries that we trade in and how our exchange rate is going along against the currencies of those economies.”

And while we’re talking about the US — the real issue is our biggest trading partner.

Rabobank senior foreign exchange strategist Jane Foley put it bluntly from London in a recent report.

“China, Australia’s biggest export partner, has sunk into deflation against the backdrop of rising headwinds,” she wrote. 

These include:

  • Falling property prices
  • Mounting issues for property developers
  • Soft retail sales and production data
  • Poorer industrial profits
  • Elevated youth unemployment.