As I returned to work after the Christmas holidays, I checked in on how the economy was going and was rather startled to read the headline “Panic as Aussie dollar crashes to five-year low”. Cripes. So much for easing into the year.
It wasn’t even a week in and already I was wondering if I needed to rush to the shops and buy up all the canned goods on offer. But, as is often the case with economics and news headlines, things are not as grim as they might seem.
As Stephanie Convery explained last week, all of the kerfuffle is around markets preparing for Donald Trump to take over and possibly bring in 60% tariffs on Chinese imports. That would probably cause the Chinese currency to depreciate at a time when China’s overall economy is pretty weak.
Because we export a lot of iron ore to China, the Australian dollar is often viewed as a proxy for China – and so it has also gone down in value.
That’s pretty much it.
As the RBA board noted in the minutes of its December meeting, the dollar had fallen mostly because of the “broad-based strength in the US dollar, though market participants had reported that they also reflect concerns about the outlook for the Chinese economy”.
In other words, it’s not really because of anything happening here. It’s simply that when the two biggest economies in the world start splashing around in the economic pool, Australia often gets wet.
But it is not time to panic – especially given any such concern should really have happened in the week before Christmas, when the value of the dollar fell from US$0.637 to US$0.623 in four days.
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That meant that were you planning on buying a book from the US for the price of US$29.95, on 13 December it would have cost A$47.04, whereas on 20 December it would have cost A$48.10. If you bought it on Tuesday this week, the price would have been A$47.85.
And sure, that might matter if you were planning on buying 10,000 copies of that book to sell in stores, but for most people doing a bit of online shopping, we’re talking about a dollar.
This is the thing with exchange rates. Panic is easy to do if your income lives and dies by the smallest margins of movements on the market but, for most of us, it really is not.
The past 12 months reveal that the current value of the dollar is low but the “crash” that is causing “panic” is just a shift from an average over the year of about US$0.65 to US$0.66 to the current level of about US$0.62.
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An even longer look, over the past 25 years, gives better context. Yes, the dollar is lower than it has been for a while but there is no real sense of a crash. You might note as well that while the dollar actually went above parity with the US dollar between 2011 and 2013, that was hardly a period when Australia’s economy boomed:
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Indeed, far from being something that was good for the economy, the strong Australian dollar wreaked havoc with exporters – especially in the manufacturing industry.
It is why talking about the exchange rate in terms of being good or bad – or indeed something to panic about – is a bit silly. A falling Australian dollar will benefit Australian exporters and will be worse for those importing goods.
It’s terrible for those trying to sell you an overseas trip and great if you’re a tourism business catering to travellers from overseas. Great if you’e hoping to get a Hollywood film to be produced here in Australia, bad if you’re wanting to import a lot of cars.
Australians will feel the impact most notably in petrol prices. In the middle of 2001 the Australian dollar was worth about US$0.76. At the time the average cost of oil on the world market was US$71.80; in December it was US$72.31, roughly the same.
But because the value of the Australian dollar has fallen, the cost of oil in Australian dollars in the same period went from A$95.51 to A$116.31 – a 22% increase:
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This matters because the cost of petrol in Australia is strongly linked with the world price of oil in Australian dollars.
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This is what might cause Australians to feel the impact of the exchange rate fall, because the increased prices of imports will cause inflation to rise faster than it otherwise would.
Imported goods make up about 35% of all items in the consumer price index basket and some economists have been suggesting a falling dollar might mean the RBA will hold off on cutting rates.
But as noted above, the RBA knows what is happening and while, interest rates do affect exchange rates – because places with higher rates are more attractive to investors – when you’re talking about trying to counter the impact of Trump’s 60% tariffs and the growth of the Chinese economy, a 25-basis-point cut in the cash rate will make a negligible difference.
Rather than worry about the exchange rate, the RBA needs to focus on the domestic economy. Wednesday’s inflation figures showed that the RBA can start cutting rates without concern:
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The market has not changed its views on the speed of rate cuts in the next few months – even if it’s now thought there will only be three rate cuts and not four, as expected a month ago.
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So don’t panic. The dollar will go down, and up, and some will benefit and others will not, and the RBA should not use it as an excuse not to deliver Australians the necessary relief of a rate cut.
Greg Jericho is a Guardian columnist and chief economist at the Australia Institute and the Centre for Future Work
