The Australian dollar is entering a period of dormancy, primarily due to fluctuations in interest rates and commodity prices.

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Not too far in the past, a robust currency was indicative of a nation’s strength and economic dominance. Numerous countries linked their currency to major powers like the US dollar or artificially maneuvered their monetary strategies to enhance exchange rates.

Prior to the Australian dollar’s floatation nearly four decades ago, devaluing the currency was comparable to committing political harakiri.

Even post-floatation, a devalued Australian dollar was seen as a negative reflection of economic stewardship, essentially a report card on our international reputation.

However, all this began to shift around the dawn of the new millennium as the trend started moving in the opposite direction.

Major economies all attempted to control the strength of their currencies and, following the global financial crisis, actively strove to devalue them in order to secure a competitive edge in international trade.

Japan took the lead in this endeavor, swiftly followed by the United States and the European Union. Subsequently, a worldwide surge ensued, with nearly every significant trading nation engaging in efforts to drive down the value of their currencies.

Regrettably, we found ourselves caught in the midst of this currency struggle. In the aftermath of the GFC, the Australian dollar surged to post-float record highs, resulting in significant economic repercussions. It reached approximately $US1.10 against the US dollar and 0.86 Euros.

However, the tide has turned. Despite consistently achieving trade surpluses since 2017 and even achieving a budget surplus this year for the first time in over a decade, the Australian dollar is currently experiencing a decline.

This trend appears poised to become firmly established for two main reasons: commodities and interest rates.

The Plunge of the Commoditized Currency
To grasp our upcoming trajectory, it’s essential to comprehend our historical path.

While Australia holds a significant status as a trading powerhouse, exporting substantial quantities of minerals, energy, and agricultural products globally, our economy remains relatively modest in scale.

This dynamic has elevated our currency to the ranks of the globe’s most heavily exchanged. It is influenced by the fluctuations in prices of commodities like iron ore, coal, natural gas, and wheat. However, our government and central bank possess limited maneuvering space for direct intervention or control.

It’s also renowned for its significant volatility. In the mid-1980s, shortly after then-treasurer Paul Keating issued a cautionary note about potentially becoming a “banana republic” without essential reforms, the currency briefly dipped below $US0.50. It revisited this level once again in September 2001 after the terrorist attacks on the World Trade Centre in New York cast a shadow over global trade.

In the aftermath of the GFC, China injected substantial funds into stimulating its economy, propelling iron ore prices to unprecedented heights and bolstering our national revenue. Riding this wave, our dollar surged to new post-float peaks.

This had dual repercussions. Firstly, significant foreign investments poured into Australia to establish new mines and expand existing ones. Secondly, our interest rates remained notably higher than those in other developed nations, attracting substantial global capital in search of favorable returns.

This further elevated the Australian dollar. While this surge on paper may have appeared to make us wealthier than ever before, it paradoxically led to a weakening of the economy.

The appreciating Aussie dollar dealt a blow to the domestic manufacturing sector, rendering it unable to compete with inexpensive imports from Asia, particularly China. This era also marked the emergence of the “two-speed economy,” wherein the traditionally robust eastern states faltered while the western regions thrived.

Once more, the tides are shifting. China’s economic performance is encountering challenges, with a turbulent property sector, surging youth unemployment, a shrinking and aging population, and mounting government debt.

Iron ore prices, currently at $US106 per tonne, stand at half the levels witnessed two years prior, and this trend is anticipated to persist in the medium and long term as global production escalates.