There is little sign of the Aussie dollar's rocky start to the year ending, with the currency recently falling to five-year lows against its American counterpart and a basket of other currencies.A combination of the strong greenback, the impact of a weakening Chinese economy and struggling domestic growth are punishing the Aussie dollar on the currency markets.It has been hovering around 62 US cents over past weeks, but recently slumped to 61.32 US cents – almost a five-year low.
The Australian dollar has plunged against the greenback in recent months.
Global events playing a big part
Economic futurist Evan Lucas says the fortunes of the Aussie currency and the wider economy are being shaped by events in Washington and Beijing."We've been playing up with two sides, the US threatening tariffs on China which has put our biggest trading partner under a bit of pressure."The Australian dollar is seen as a proxy to the Chinese economy, which is why it has declined the way it has … we then have the Chinese devaluing their currency to make their exports more appealing to the rest of the world."With the Aussie dollar weaker, the impact on our economy – a net importer – has been more expensive goods at home, which help to fuel inflation."All of our products appear more expensive, at least in the short term .. and that is where the inflation story is arising from."
Australia and the fortunes of the dollar will be affected by a global trade war. (Getty)
How does it impact interest rates?
Lucas says the The Reserve Bank of Australia (RBA) would be concerned if the Australian dollar continues to hover around 62 US cents.The RBA wants inflation to be constantly between 2 per cent and 3 per cent, before it considers rate cuts."It does put the inflation pressure firmly in focus that imported goods are more expensive because our currency is so cheap."Travel destinations where the Australian dollar is strong right nowView GalleryAnother factor that threatens to keep the Aussie dollar in the doldrums is the prospect of interest rate cuts.One effect is to make 10-year Australian government bonds less attractive against counterparts from other countries, including the US."That's part of this whole conundrum. The future prospect of rate cuts is also pushing the Aussie (dollar) lower."
Japan has been one of the few affordable destinations for Australian travellers, but that may not continue. (Getty)
What does it mean for Aussie travellers?
Anyone who has been on an overseas holiday recently will have found most purchases, from a steak in New York, to a cup of coffee in Rome, to a pint of beer in London, expensive.Japan, the number one travel destination for Australians, has become something of a currency haven for travellers, thanks to a weaker yen.But that could change in the months ahead, says Lucas.During 2024, for the first time in about 40 years, the dollar was technically worth more against the yen."But it's come off … the yen has appreciated over 10 per cent against the Aussies, so that leaves us asking will there be a slowdown in Australians going to Japan."
