Falling Australian dollar creates both economic challenges and opportunities in 2025

We are not long into the New Year and already it looks like we will be dealing with a familiar recurring challenge – an Australian dollar that is weak and getting weaker against many major currencies.

Having hit multi-year lows of just 61.88 US cents, it is a strong reminder of the pandemic era when a run well down into the US50’s was often threatening.

The warning signs are all there – a rampantly strong US dollar as Trump prepares to take power, a continuation of economic weakness for our major trading partner China and with the Reserve Bank belatedly looking to ease official interest rates.

It is difficult to see anything on the horizon that could strengthen the Australian dollar but as we all know so well, it is very easy to go broke trying to second guess future currency movements.

How will a weak jumbuck hit us?

So, what would be some of the effects of a low Australian dollar in 2025?

Well, one particularly unwelcome one would be an increase in the price of imported goods, although hopefully not those coming from China given we are both lumped into the weak currency basket.

Some of these higher prices – particularly petrol – flow through to many other areas.

Higher import prices leads to higher inflation which usually leads to higher interest rates – or, at least, to rates that stay higher than they otherwise would.

For those who like to holiday offshore, particularly in countries with much stronger currencies such as the US and most of Europe, the lower dollar is a real spending headwind.

A lower dollar tends to support overseas trips to fellow low currency countries and lower priced alternatives such as many parts of Asia and particularly Japan.

Competitive export advantage

On the positive side, a lower dollar lends a significant competitive advantage to Australian exports, many of which are priced in US dollars which will increase Australian dollar profits.

In the end though, for Chinese centred bulk exports such as iron ore, the price already seems set to remain more muted anyway, so any currency gain will just be offsetting the price action a little bit anyway.

There doesn’t seem to be much sign of the US dollar weakening, with the indications that the US Federal Reserve will pass fewer rate cuts than expected and the protectionist trade policies of Donald Trump helping to keep the US dollar strong.

Lower dollar adds spice to Federal Election

Currencies generally rise in value when interest rates remain higher and at a premium to other similar countries.

Should the Australian dollar fall enough it could even lead to the Reserve Bank taking action by tactics including buying Australian dollars on currency markets or by delaying interest rate cuts or even raising interest rates.

It all makes for an interesting start to 2025 which could have ramifications for many areas of Australian life and particularly for investment markets in general and for the cost of living during a Federal Election year.