Why the Australian dollar is falling — and how it reaches your household budget

A weaker dollar makes overseas purchases more expensive, raises costs for Australian businesses and complicates the fight against inflation. But its effects spread unevenly across the nation.

Australians do not need to travel overseas to feel the consequences of a falling dollar.

The effects can arrive through a new phone, replacement car parts, imported clothing, a business software bill or the cost of transporting groceries.

When the Australian dollar buys less foreign currency, the country’s purchasing power abroad falls. Bringing the same goods into Australia can require more Australian dollars, even when the overseas supplier has not increased its price.

The Reserve Bank’s indicative exchange rate fell from 70.14 US cents on Thursday, November 5, to 69 US cents on Friday, November 6 — a decline of about 1.6 per cent between its daily readings. The dollar also weakened against several other major currencies.

For households already watching their spending, sustained currency weakness adds another source of pressure.

Why is the dollar falling?

The recent decline reflects a combination of changing interest rate expectations and nervous global financial markets.

Australia’s interest rates matter, but currency traders compare them with rates overseas and assess where both are heading.

The Reserve Bank raised its cash rate to 4.85 per cent on November 3. However, market commentary attributed the dollar’s subsequent weakness partly to the divided decision and expectations that further Australian increases could become less likely. A widely anticipated rate rise does not necessarily lift a currency if investors interpret the accompanying message as signalling a pause.

Meanwhile, stronger-than-expected American employment figures reinforced expectations of further US monetary tightening. A global sharemarket sell-off also encouraged demand for the US dollar as investors reduced their appetite for risk. Both developments weighed on the Australian currency.

More broadly, Australia’s dollar responds to commodity prices, demand from major trading partners and expectations about economic growth. Those are continuing influences, although they should not all be treated as proven explanations for a particular day’s movement.

What a weaker dollar does to a purchase

The arithmetic is straightforward.

Consider a hypothetical overseas purchase costing US$100, with the foreign price unchanged:

These illustrative amounts exclude delivery, applicable taxes and currency conversion charges.

Moving from 70 US cents to 65 US cents would increase the Australian dollar cost of that purchase by about 7.7 per cent.

The shopper receives exactly the same product. More Australian money is needed to pay for it.

Will Temu and similar purchases become more expensive?

A weaker dollar creates upward pressure on the Australian cost of overseas online shopping. It does not mean every Temu, Amazon or other marketplace listing immediately increases.

A seller displaying Australian dollar prices can absorb a currency movement, change a discount, adjust delivery charges or reprice later. Existing stock, supplier agreements and currency hedging can also delay the effect.

For Chinese-made goods, the Australian dollar’s movement against the Chinese renminbi matters too. The US dollar exchange rate alone cannot explain every marketplace price.

In the RBA’s November 6 readings, the Australian dollar bought fewer renminbi as well as fewer US dollars than on the previous day. That points to broader purchasing-power weakness, rather than a movement confined to the American currency.

The practical conclusion is that overseas bargains face additional cost pressure. Whether shoppers see that pressure at checkout depends on the seller’s pricing decisions.

Australian retailers importing similar products face it as well.

Why price increases can arrive later

An exchange rate changes continuously. Retail prices usually move more slowly.

A retailer may still be selling stock bought when the dollar was stronger. A business may have locked in an exchange rate for upcoming purchases. Another may accept a smaller profit margin because customers are resisting higher prices.

Eventually, replacement stock can expose the business to the new currency cost.

Research published by the RBA finds that exchange rate changes flow strongly into import prices, while their effect on overall consumer prices is smaller and slower. Australian wages, rent, transport and other domestic expenses also form part of a retail price. A currency decline therefore does not translate into an identical percentage increase across shop shelves.

Fuel can transmit the pressure widely

Fuel is a particularly important connection between currency markets and everyday expenses.

International oil and petroleum product prices are commonly expressed in US dollars. A weaker Australian dollar raises their Australian dollar equivalent, all else being equal.

That can offset part of the benefit when international prices fall.

The eventual bowser price also depends on refining margins, shipping, taxes, competition and local pricing cycles. Currency is one influence among several.

For businesses using trucks, delivery vans, agricultural machinery or construction equipment, fuel pressure can spread into the cost of providing other goods and services. Imported equipment and components create additional exposure. These are examples of how higher import costs can reach consumers indirectly.

A harder task for the Reserve Bank

A sustained depreciation can complicate inflation control.

Higher interest rates restrain domestic spending. A weaker currency can simultaneously increase the cost of imported goods and business inputs.

The RBA’s November statement already described broad inflation pressure, a slowing economy and businesses passing on higher costs. It also identified fuel-related price increases flowing into other goods and services.

Further currency weakness could add to that difficult combination.

It would not automatically trigger another rate rise. The Reserve Bank considers the wider inflation and employment outlook, and the persistence of exchange rate movements matters more than one volatile trading session.

Nevertheless, more expensive imports can make the return to low inflation harder.

Australia also has beneficiaries

A lower dollar can support parts of the economy.

Exporters receiving foreign currency may collect more Australian dollars when they convert their earnings. Australian tourism and education can become more affordable for overseas visitors and students. Local producers may become more competitive against imported alternatives.

Those gains can support employment and regional economies. However, exporters themselves often buy imported machinery, fuel and materials, which reduces the benefit.

The national result depends partly on why the dollar has fallen. If weaker overseas demand is pushing down both the currency and export prices, exporters may receive little comfort from the exchange rate adjustment.

A cheaper currency cannot by itself create stronger demand for Australian products.

What it means for the average Australian

For an individual household, exposure depends on spending, employment and investments.

An overseas holiday can become more expensive. A foreign-currency subscription can require a larger payment. Imported appliances and replacement parts can face higher costs when sellers replenish stock.

There can also be offsets. People employed in export or tourism businesses may benefit from stronger competitiveness. Overseas investments held without currency hedging generally rise in Australian dollar value when the dollar falls, assuming the foreign asset price remains unchanged.

But those benefits do not necessarily reach the same households paying higher prices.

Someone with little invested overseas and a tight weekly budget may experience the purchasing-power loss well before any wider economic benefit.

The Times View

The Australian dollar deserves attention because it influences what Australian incomes can buy.

A sustained fall can help some employers and exporters while making household purchases and business investment more expensive. The distribution of those gains and costs matters as much as the national total.

The next question is whether the latest weakness persists. A brief market movement may have limited consequences. A prolonged decline would give importers, retailers and households another adjustment to make — at a time when many already have little room in their budgets.

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