Forex

The Australian dollar is dropping – but why?

If you’ve been keeping abreast of the news over the last few months, you’ll be familiar with the various headlines detailing the drop of the Australian dollar. But with so many voices arguing the different reasons for the dollar’s decline, it can get complicated trying to understand where this trouble started. That’s why we’ve taken a simple look at the key reasons behind the dollar’s fall – and the effect each one has had on the Aussie economy.

After a successful few years, ‘the wheels are finally beginning to fall off the Australian dollar’ warned Matt Simpson, a senior markets analyst for ThinkForex. It’s safe to say that this seems to be true, and the reasoning isn’t singular in nature, but instead an unusual mixture of events – not all of them in our hands.

At home the mining boom has unfortunately faltered, with iron prices depressed further by China’s troubles – but more on that later. It could be argued that as the mining investment hit its peak in 2012, this downturn was a long time coming, and responsibility falls towards our own dependence on the industry.

As the mining boom weakens and small mining towns pay the price, the housing market proved itself to be the only sector able to take its place. This intense focus and dependence on one area has left the housing market susceptible to a property bubble, fit to burst. Indeed, the new challenge faced by the Reserve Bank involves adequately stimulating the economy whilst keeping the problematic property bubble in check.

Domestic problems aren’t, however, the sole cause behind the drop in value for the Australian dollar. Instead, we should cast an eye to the world stage, where growth (and lack thereof) in overseas territories has impacted upon the AUD.

As previously mentioned, China’s own troubles have brought down the prices of iron ore, further weakening the mining industry in Australia. As a plan to limit pollution ahead of 2014’s APEC convention, China oversaw the temporary closure of several steel mills – which is why we saw the price of iron ore drop to its lowest in five years during the tail end of last year. Furthermore, China’s own growth is reportedly the weakest it’s been for twenty-four years; being our main trade partner, this isn’t good news for domestic finances.

But negative changes in China aren’t the only overseas factor dropping the value of the dollar. As you would expect from arguably the most powerful country in the world, recent strengthening of the greenback has benefited the States, with a knock on effect for several other countries, such as Canada and Australia. With plans to raise interest rates next on the agenda for the US Congress, the growth of the US economy could come at a price for smaller nations.

As this collection of circumstances continues to drop the value of the dollar, confidence levels also continue to drop, making the plight of the dollar all the more frightening. Whereas once it was seen as a safe investment with high returns and low risk, recent troubles have forced investors to seek an alternative elsewhere, further damaging the currency’s value. Instead, it’s reported that investors look to the Yen, buying from Japan and seeking the benefits in the US.

All in all, there’s no one single reason for the dollar’s recent decline in value – Australia is instead at the mercy of an unfortunate collection of events, caught between domestic matters and the affairs of other nations. Although the often predicted scenario of recession in 2015 seems likely, it is worth remembering that the economy is in constant flux; although some of the AUD’s allure has inevitably faded following recent troubles, we can be sure that its value won’t stay low forever. In fact, we’d bet our last dollar on it.

About The Author

Rachel Maher is a financial content writer from Western Australia, she writes for Fairgofinance.net.au