Aussie dollar plunges to ‘crucial’ low
The Australian dollar has fallen through a key level as the global economy stumbles.
The dollar is now worth just 69.4 US cents, following the news that President Donald Trump's trade war is spiralling into a new and dangerous phase.
The 70 cent level is a crucial one for the Australian dollar. The dollar fell below that level for about nine months during the GFC. It briefly dipped below that level during the market weakness in January this year.
Otherwise, there has only been one period in Australian history where the dollar was worth less than US 70 cents for any decent length of time - the early 2000s
Of course, the dollar could be just blipping below 70 and might recover. But if Donald Trump's trade war continues, we might have to get used to this new low level of the dollar.
A LOWER DOLLAR CAN BE GOOD NEWS
Imagine you are an Australian company that exports. Last week, when you sold something worth 71 US cents you got one Australian dollar. Now, when you sell something for 71 US cents, you get more than one dollar. A lower dollar translates into free money.
In this way, a lower Australian dollar makes Australian exporting companies better off. And at the moment, we have a lot of exporting companies. Australia is currently in a big trade surplus with the rest of the world, as the next chart shows.
If you work in agriculture or mining, tourism or education, you're part of that exporting sector, selling goods and services to foreigners.
When the dollar falls, Australian goods get more competitive overseas, and Australian exporting companies can either cut prices to sell more, or sell the same amount and make more profit.
HIGHER PRICES ACROSS THE BOARD
Of course if you are an importer, the lower Aussie dollar is bad news. And for consumers, a lower dollar means higher prices.
The effect is most noticeable if you travel to the USA and have to change your money into US currency. You'll get less for every dollar you exchange. The side effect of that is that you might stay in Australia and spend more money here.
So a lower dollar creates some winners and some losers but overall it is expected to be helpful for the economy. A dollar in the 60-cent range will provide some cushioning and make it easier for the economy to endure any downturn in global trade.
Donald Trump's trade war with China is a real problem for Australia. Our exports - iron ore and coal and gas, education and tourism, milk and meat - go heavily to China. And a big slice of their exports go to America.
Mr Trump has pledged to increase tariffs on certain Chinese exports to America to 25 per cent. A tariff is just a tax on imports. That means when those goods arrive on the docks in America they have to pay a 25 per cent tax. A Chinese T-shirt that would have cost $10 now costs $12.50. The importer pays that tax and passes on the higher price to American citizens when the goods are sold in the shops.
In that way, American citizens buy fewer Chinese imports and China suffers. The Chinese might reduce the price of their exports to America a little if they can, for example, selling that T-shirt for $9 instead of $10. But it will still face a tariff.
In the end both sides lose - American consumers face higher prices and Chinese companies have to sell at lower prices. The difference all goes to the tariff in the middle.
The problem with the trade wars is that when Trump puts up tariffs, China retaliates by putting up tariffs of its own.
Someone needs to compromise or the economies of both countries will suffer. Mr Trump thinks he has the upper hand. But in a year's time he has to start worrying about getting re-elected.
Mr Trump and a Democrat will be competing for the 2020 Presidential election. That's something President Xi Jinping will never have to worry about. Does Mr Trump want to be stuck in a damaging and protracted trade war during an election campaign?
Mr Trump once claimed trade wars were " … good and easy to win."
If China decides not to compromise, those words could come back to haunt him. And the problems in global trade could continue for a long time. If that's the case, the Australian dollar could go even lower and the US70 cent level could seem like a distant memory.