Dollar on shaky ground

Aussie currency tipped to fall by early ’23

A 10 PER CENT surge in the Aussie dollar’s value in just one month is pleasing Christmas travellers and online shoppers, but our currency’s outlook is clouded by global uncertainty.

Since October 16 when the Australian dollar fell below US62c, it has rebounded to US68c amid improving prospects for inflation, interest rates and China’s economy.

However, some economists warn it could slip back below US60c by early 2023 – putting pressure on many international holiday plans and people buying goods in US dollars.

Australia’s dollar remains well below the US76c it reached in April but it has either climbed or remained level with other popular currencies such as the British pound, euro, Japan’s yen and the New Zealand dollar.

KPMG chief economist Brendan Rynne said the weakness this year had “nothing to do with Australia”.

“It’s completely had to do with the US dollar,” he said.

The US currency soared in value as financial markets sought safety amid fears of global recession, while interest rate rises by the US made it even more attractive.

A lower-than expected US inflation figure of 7.7 per cent announced last week lowered the likelihood of more supersized US rate rises.

“It’s still very high, but not as high as what the market was thinking it was going to be,” Dr Rynne said.

He said the Aussie dollar was among the world’s mosttraded currencies, linked with commodity prices and helped by fresh feelings that China’s economy would benefit from easing Covid restrictions.

“We still think fair value is in the low US70c range, and over the longer term US75c,” Dr Rynne said. “But what you are seeing is the currency markets playing out uncertainty and global turmoil.”

CommSec economists expect the Aussie dollar to fall back to US62c in December and US59c by March 2023 before bouncing back to US67c by December 2023. The key driver of its rebound to eightweek highs in recent days was the US inflation data but there were “a lot of variables in play”, said CommSec senior economist Ryan Felsman.

“We are still forecasting it to fall below 60c in early 2023 because we have an outlook for a global recession, higher volatility in financial markets and a weaker outlook for China,” he said.

Mr Felsman said the US currency should remain strong because official US interest rates were expected to climb further to put the brakes on inflation. He said US wages growth was running near 6 per cent – about twice as much as Australia’s.

He said the official US interest rate was likely to rise to 4.75 per cent “at least”, while Australia’s would probably reach 3.5 per cent, up from its current 2.85 per cent.

“There is a lot of water to wash under the bridge,” Mr Felsman said.

“It’s important to remember that the Australian dollar has performed better against a basket of other currencies.”