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What's in Store for the Aussie Dollar

The Australian dollar has fallen below 74 US cents, with levels almost below 73 US cents in early July. This dip was the lowest level the local currency has been since early 2017, with some experts predicting even lower levels in the months ahead. Whether you're running a large export business or simply doing your best to run a family, a strong or weak Aussie dollar can have a considerable impact on the price of investments and the cost of everyday household items.

Currency experts are far from united on the future of the Aussie dollar, with some predicting a significant crash and others expecting the currency to surge on the back of recent lows. While the foreign exchange market is always difficult to predict, divergence between commentators is more pronounced than usual. Like always, the future of the local currency depends greatly on domestic growth, the speed of the US recovery, and the economic situation in China.

There has been a steady, staircase-like rise in US interest rates since early 2017, with two jumps already seen in 2018. There's very little doubt that the Federal Reserve will raise interest rates again later this year, the question is how soon and how many times? There's even significant disagreement within the Fed's own committee, with at least one more rate hike expected later this year. US rates are now higher than Australia's for the first time in 17 years, at 2 percent compared to 1.5 percent. 

While it's never quite this simple, higher US interest rates generally make America a more attractive place to invest, with money moved away from Australia and less demand for the local currency being the end result. With US rates now higher than Australia's after such a long cycle, money is flowing out of the country. The Aussie dollar dropped almost 3 percent in a single week back in April, as the US dollar found favour with investors amid a pick-up in 10-year US Treasury yields. For the most part, the struggling local currency is the result of a strong US dollar.

The Australian dollar is also taking its cues from movements in the offshore traded Chinese yuan, with much of this movement related to a rise in US-China trade tensions. A number of major assets recently tumbled after the United States confirmed it would impose tariffs on a further $US200 billion worth of China's imports, including the Australian dollar, gold, oil, base metals, and a range of global stocks. Additionally, the Chinese currency was effectively devalued by 2 percent in late June, its biggest devaluation in almost three years.  

According to NAB's senior foreign exchange strategist Rodrigo Catril, "The Australian dollar is often seen as a liquid proxy option for emerging market exposure given the strong Australian economic links with China... Thus it is not surprising to see the Australian declining amid the current trade-driven global growth concerns." As long as global trading conditions remain in uncertain territory and US interest rates keep growing, the Australian dollar will struggle to find upward momentum. 

 

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