Australian dollar down, but that was the whole idea

The Aussie news lately has been filled with headlines about the Australian dollar ‘plummeting’ from US$1.04 down to US$0.95, and below. There has been alarmist talk about the impact on imported goods, and especially the impact on the price of petrol.

But the Australian dollar coming down should not be any kind of surprise to anyone.

The primary reason the Reserve Bank of Australia (RBA) has been bringing the interest rate down over the last 18 months was to ‘correct’ the Australian dollar. A high Australian dollar is not good for exporters, and therefore, by extension, not good for Australia.

A high Australian dollar means just about the entire mining industry in Australia gets less money for their (our) resources. It means the tourist industry suffers. It means that just about all manufacturing in Australia—well, what’s left of it—brings in less money to the country.

The Australian dollar is currently around US$0.92 but the end-point target of the RBA is more like US$0.88. So, assuming they continue on this path, you can expect the dollar to fall a little further yet.

This correction in the value of our dollar is likely to push regular petrol to up around $1.55 a litre, depending on how the price of crude goes; and it is actually going down right now so that is offsetting the impact of the falling dollar.

Imported good such as TVs, smartphones, HiFi, dishwashers, fridges, and most of our clothes and motor vehicles (because most of them are imported) will go up a bit. Although the intense competition in the electrical goods market is likely to keep the prices of these products down.

The cost of new cars may go up by around 3 to 4 percent by the end of the year (assuming the dollar remains around the US$0.93 zone), but this would only add around $1,000 to a new car that now costs $30,000—this is not exactly a large cost increase.

So, like I say—the correction in the dollar was something being driven by the RBA for the overall good of the Australian economy.

However it could  happen that other economic forces may push the dollar back up, in which case the RBA’s plan will be set back and none of the above will happen.

BarryMark