The Australian dollar's sharp decline against the US dollar this year could pressure the Reserve Bank of Australia to delay rate cuts, economists have cautioned.
The Aussie dollar is down nearly 9% since January, approaching levels last seen during the COVID-19 pandemic in 2020.
Economists suggest this depreciation, driven in part by expectations of a stronger US dollar under an incoming Trump administration, could increase import prices and contribute to inflation.
AMP chief economist Shane Oliver noted that every 10% drop in the Aussie dollar adds 0.1% to 0.15% to inflation.
He warned that a potential trade war between Donald Trump and China could further weaken the currency, with severe impacts on the RBA's monetary policy.
"If the Aussie dollar falls below 60 US cents or drops 20% from the start of the year, it could force the RBA to reconsider its rate-cut timeline," Oliver said.
IG market analyst Tony Sycamore echoed this view, stating that if the AUD/USD falls below 0.6000 and stays near 0.5500, it could delay the RBA’s first rate cut. However, he expects the currency to remain above 55 US cents.
Betashare's chief economist David Bassanese attributed the Aussie dollar’s decline more to US dollar strength than domestic issues.
While a weaker currency adds to imported inflation, he said it is unlikely to derail rate cuts unless broader inflation trends worsen.
Economists emphasised that the RBA's focus remains on services inflation, a predominantly domestic issue, while imported goods inflation, affected by the Aussie dollar, has a delayed impact.
On a trade-weighted basis, the Aussie dollar has fallen 4% this year but remains within its historical range.