THE Australian dollar has plunged to three-year lows versus the US dollar this week, buffeted by international uncertainty and a gloomy outlook for the global economy.
The dollar was trading as low as US64.39c this morning, falling US2.5c over the past week, and 4.6c or seven percent over the past month.
Apart from a period around March 2020 when the currency sank briefly to US58c on early COVID impact fears, the currency value has not been this low since early 2009.
Almost all of Australia’s export beef and lamb trade is conducted in US dollars, and the lower the value of the A$ the better, for international competitiveness.
Export meat traders this morning said that while the lower A$ value was welcomed, it would take time to be factored into business, and as described in today’s separate weekly kill report, and was still only helping partially offset large losses on slaughter cattle currently being recorded.
The main reason for the currency drop appeared to be declining global market sentiment as investors fret over the US Federal Reserve’s aggressive rate policy to tame US inflation, which could drag other major world economies into recession. Central banks everywhere are trying to slow down their economies to stop inflation from getting any higher.
On top of worries over global growth, the US Federal Reserve is also wary of geopolitical concerns from Russia’s war in Ukraine, currently bolstering the ‘safe-haven’ US curtrency.
Commonwealth Bank currency analysts yesterday suggested the darkening outlook for the global economy and lower commodity prices were weighing heavily on commodity-linked currencies such as the A$, which could continue to set new cyclical lows this week around US65c.
While the A$ has been significantly impacted, other countries like Japan’s Yen and the UK Pound have fared even worse against the US$. The British pound tumbled to a record low of $US1.0349 on Monday as the UK government’s planned tax cuts as part of an economic growth plan continued to scare traders.
The Australian currency won’t be the only one impacted though, with the weakening global outlook becoming a burden on most currencies versus the US$. The US currency will continue to remain supported by the economic policy divergence between the US and other economies and global recession risks, Commbank said.
“A key part of our currency view is that large parts of the world economy will enter recession in 2022 or early 2023,” it said.
Commonwealth Bank Global Markets expects the A$ to reach US62c by the first quarter next year.
One reason for the unprecedented collapse in the UK pound is the world is becoming more dangerous, financially speaking, News.com reported.
“Recession talk is in the air, as central banks try to slow down their economies to stop inflation from getting any higher. When recessions happen, investors like to move their money into safe investments – and the safest investment is US bonds. That’s why it’s called a safe haven.”
“To buy US bonds you need to have US dollars, so investors need to buy US dollars on the currency markets. The extra demand makes the US$ go up, just like extra demand for any product makes the price go up.”
So part of the reason the UK Pound and to a lesser extent the A$ is getting pounded is that the US$ grows stronger, as the world economy gets wobbly.
Some currencies are likely to continue to fare worse than the A$ over the next few months, particularly as Australia’s terms of trade remain high, buoyed by high energy prices, AMP chief economist Shane Oliver said.