Analysts: Australian dollar could drop further

Posted: 19 March 2020 11:40 am
Man and Horse on Australian Dollar

Australia's main exports are hit hard by coronavirus, while demand for the perceived safety of the greenback may continue growing.

The Australian dollar is currently at 0.58, at an 18 year low against the US dollar. Further pain may be on the cards, analysts say.

The primary reasons given are that many of Australia's key exports are especially at risk of a coronavirus slowdown. These include coal, iron ore, natural gas, education and tourism.

As demand for these exports drop, so does demand for the Australian dollars needed to pay for them.

This drove a particular decline in the value of the Australian dollar, which is now down almost 11% in the last 5 days. With a newly-implemented travel ban and slowing industrial activity around the world, it's possible that there are more declines to come.

A second factor responsible for the shift is the highly in-demand US dollar. The US dollar index (DXY) is up 4% in the same period of time.

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The USD is rising due to a combination of factors, including its status as a safe haven, and banks tightening the purse-strings among concerns that more borrowers will start defaulting on their loans.

As with the factors depressing the Australian dollar, this could get worse before it gets better.

"We underestimated how acute dollar-funding pressures would become," said George Saravelos, global head of FX research at Deutsche Bank. "We worry that fixing this dollar shortage may be more difficult than policymakers think."

With a total travel ban now in place for all Australians, there are no longer any travellers to feel the pinch of a falling Australian dollar.

But for the Australians sending remittances overseas, or who need to make business money transfers, a decline of this magnitude can be a game changer.

Comparing international money transfer services before sending funds overseas can go a long way towards offsetting the change, and if further drops are likely it may be a good idea to utilise forward contracts to lock in rates now, ahead of a potential future slide.

Forex news

Picture: GettyImages

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