The US dollar has lost a great deal of value over the past year. According to Reuters, the greenback’s value fell to a three-year low before rebounding in value on Monday, but could fall even farther due to the budget deficit and news that other central banks will start raising interest rates.
Investors should expect most other currencies to strengthen in value as a result, but one exception could be the Australian dollar. After reaching an exchange rate of 1 AUD = 0.81 USD in late January, the Australian dollar has fallen to its current value of 79 cents and is likely to continue to decline over the next year. Different priorities between the central banks of the United States and Australia along with other economic conditions show just why the AUD will continue to fall.
Raising Interest Rates
That the AUD is expected to fall is less surprising when we look at the Australian economy. Yes, there are some good signs. Consumer spending has been up and unemployment is going down. Yet wage growth remains weak and underemployment is a serious problem. Furthermore, Australian citizens still have to figure out the problem of ever escalating household debt which would be more difficult to service if interest rates were higher.
As a result, the Royal Bank of Australia has indicated that it does not intend to raise interest rates anytime soon. By contrast, the United States Federal Reserve is expected to raise rates at least three and more likely four times this year thanks to a strong economy which has begun to see prices and wages rise for the average American worker. Raising rates means higher yields, which strengthens the USD even in the face of a fiscal policy designed to weaken the dollar.
Of course, the USD has continued to stay weak despite higher bond yields and the good state of the US economy, and financial experts remain puzzled as to why. Some at the Financial Times point to President Trump’s efforts to further stimulate the economy with tax cuts as a potential cause, while others look at global economic expansion.
Regardless of the reason, the USD is far more likely to become strong again compared to the AUD given the likelihood of an interest rate raise and the better economy. Even if the American dollar stays weak, it should be less weak than the AUD and so we can expect the AUD’s value to continue to fall.
Different Currencies and the Global Economy
In addition to the differences in government policies between the two countries, there is also how the two currencies are treated on the market. The USD is often treated as a store of value, backed by the premier superpower in the world. By contrast, forex Australia shows that the AUD is often used as a barometer for the health of the global economy, but that by extension means that its value can fall during times of global economic uncertainty.
There are plenty of reasons for said uncertainty, some of which hit fairly close to home for Australia. The Chinese economy faces plenty of challenges from a general slowdown in sales to the specter of a trade war with the United States to a lack of demand for commodities. Commodities like Iron ore have been under a massive price crunch for a while now. There is some speculation about an eventual rise in prices in the face of increased investment in commodities as the USD weakens, but Wells Fargo observed that they expect bear-market dynamics to last in the commodity market for the next five to ten years. And when one considers further political instability in the United States, Europe, and the Middle East, it is hard to be confident in further economic growth.
Whether the United States dollar will continue to rise or fall is a mystery. There are plenty of indications that it should rise, but the dollar has remained stubbornly weak. But regardless of which way the USD goes, the AUD will almost be certainly be in a bear market over the next several months, and thus will lose value relative to the USD even if the USD remains weak.