The Australian dollar dropped to 61.8 US cents this week — its lowest level since the early stages of the pandemic. It’s bad news for anyone planning a trip to the U.S. for their next holiday, but some experts say there’s cause for broader concern.

With Trump’s inauguration and looming tariffs for Australia's major trading partner, China, now weeks away, should we be panicking about the currency plunge?

Today, we’ll unpack what a changing Aussie dollar means, where it’s come from, and how it might affect you.

The decline of the Aussie dollar has dominated the news in recent days, with headlines like:

“Panic as Aussie dollar crashes to 5-year low”
“A lot at stake as the Australian dollar weakens”
“Australian dollar under more pressure”

On 30 September 2024, $AU1 bought 69.18 US cents. Since then, the value of our currency has been on a pretty consistent downward trajectory. At the time of publishing, one Aussie dollar is worth 61.98 US cents.

If this story has gone over your head, you’re not alone. Greg Jericho, Chief Economist at the Australia Institute, acknowledged it’s a bit of a “kerfuffle,” and one that can be confusing,  especially given the headlines “suggesting that we should be panicking”.

“You think, geez, do I have to go and buy canned goods and go through the whole COVID crisis all over again?” Jericho told TDA.

But before you flock to the supermarket to stockpile toilet paper, the panic could be “a little bit overblown.” Here’s why.

There are several factors behind fluctuating exchange rates. Jericho said the value of the Australian dollar generally reflects the strength of the economy, but a lot of it is out of our control on a domestic scale.

“The reality is that while we're a fairly large economy, compared to America and China, we're quite small. And when they start sort of mucking about, we get caught up in the wash.”

The “mucking about” he’s referring to involves a U.S-China trade war, which is expected to intensify under a Trump presidency.

The U.S. President-elect has pledged to introduce heavy tariffs of up to 60% on Chinese trade when he takes office later this month.

“That could really wreak some havoc,” Jericho warned.

Put simply, they’re a type of import tax. When foreign-made goods and services are brought into another country, they are subject to fees or duties known as tariffs.

Governments may use tariffs to protect local manufacturing. This is because these taxes make imported goods more expensive. So, rather than absorb the cost of import fees on foreign goods, consumers may be more encouraged to purchase domestic goods.

Geopolitical tensions and trade partnerships can also influence the tariffs a government chooses to impose on an individual country. Trump’s plan to impose harsher tariffs on China will make it more expensive for Chinese manufacturers to import goods into the U.S.

On top of the tariff uncertainty, the Chinese economy has been struggling more broadly, due to factors including falling house prices and high youth unemployment. The Chinese yuan dropped to a 16-month low earlier this week, and demand for Australian exports to China has declined. This includes iron ore — one of Australia’s highest-earning exports, worth over $100 billion a year.

“The Australian dollar is viewed by investors as a bit of a proxy for the price of iron ore and also how well China is doing, because generally, we know that if China's doing well, Australia does well,” Jericho said.

Trump’s tariff promise could hurt China even more, (and by Jericho’s metric, Australia as a result) at a time when America’s economy is relatively stable.

“It's all about China being weak, America kind of attacking China with tariffs and we [are] caught up [in it].”

The current AUD/USD exchange rate means holidaying in America will be particularly expensive for Aussies at the moment, and anyone who relies on American online shopping sites will pay more to import goods to Australia.

But how does this impact you if you’re not travelling to the U.S. in the near future?

According to Jericho, petrol prices are particularly vulnerable to price increases in this kind of environment.

All petrol in Australia is imported from overseas, with the cost of fuel determined by global oil prices. “When our Australian dollar gets weaker, we pay more for petrol and that of course means inflation generally goes up a bit… Not good news during a cost of living crisis when we're already feeling the pinch.”

It’s not all bad news though, according to Jericho, with local exporters standing to gain from a weaker exchange rate. It’s now cheaper for U.S. companies to buy goods from Australia, meaning importers can buy more from Aussie suppliers, “for basically the same price”.

“ So we get hurt by high imports, but we get helped by lower prices for our exports. It's very much swings and roundabouts,” he said.

Unless you’re an importer/exporter, Jericho doesn’t see the weakened Aussie dollar as a huge cause for concern.

“It's not really all that important, unless there is a massive plunge one way or the other,” like the dollar plunging five to 10 cents in a week, for example.

Jericho said indicators like unemployment rates, interest rates, the cost of living and petrol prices are probably more important factors for most Aussies to monitor.

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