How Low Can the Aussie Dollar Go

March 16th, 2015

The most recent assessment by the Reserve Bank has the Aussie dollar overvalued by about 2 percent, with "desired domestic economic outcomes" only possible with a drop of this magnitude. ; The national economy grew by only 2.5 percent in the final quarter of 2014, well below the long term average of the last 30 years. ; However, with interest rates left unchanged at 2.25 percent earlier this month after a cut in February, further stimulus is not being offered at the moment.

Forecasts for the Australian dollar in 2015 vary widely, with terms of trade, interest rates, and global investor sentiment all likely to have an impact. ; With the US Federal Reserve scaling back its bond buying program and the US economy growing at a rapid rate in the latter half of 2014, conditions overseas will also have a huge effect. ; If strong conditions in the US continue, most commentators expect the dollar will drop to at least 75 US cents over the next few months, possibly much further.

The dropping value of the dollar is good news for exporters, with nickel and bauxite enjoying big wins at the moment to carry the hopes of the resources industry in 2015. ; "The Australian economy has good prospects for growth over the longer term," said Kent, adding "We will probably see a continuation of trends such as the growing importance of the services sector in our economy, which is relatively intensive in terms of employment. Resource production and exports are less employment intensive, but the significant investment in that sector will continue to bear fruit for a long time."

The weaker dollar is also starting to drive manufacturers back to Australia, as the economy adjusts to post-mining boom conditions. ; According to BlueScope Steel boss Paul O'Malley in an interview with the Sydney Morning Herald, "As the Aussie dollar gets into the 70s [US cents] we get competitive, and with a year or two of that under your belt, you start to get the confidence to invest... ; It is in its embryonic stages, but we are already seeing window manufacturers and door manufacturers saying: this is easier for us to do here [in Australia] again." ;