The US dollar's demise has consequences for Australia

Australia Broadcast Center

a day ago

"I'll tell you, he's not the first," Donald Trump told reporters in the Oval Office.
The US president was referring to Elon Musk's personal attacks towards himself on social media after being asked to leave his administration.
"People leave my administration — and they love us — and then, at some point, they miss it so badly, and some of them embrace it, and some actually become hostile."
This sort of language could be perceived as unpresidential.
As is the phrasing of Trump's so-called "Big Beautiful Bill" — the name given to Trump's budget reconciliation bill that's expected to lead to both a lower tax take, and an increase in the US debt ceiling.
It was perhaps, though, the so-called "Liberation Day" tariffs that did the most damage to the Trump administration's reputation within the finance community.
Combined, it's led the financial community to question the stewardship of the US economy.
And that has important implications for all Australians.
It's impossible to dig into every confusing hole of US public policy that's produced anxiety in financial markets.
Instead, let's focus on one word that's continuing to unsettle global investors which, in turn, could be hurting the reputation of the world's largest economy.
It's "uncertainty".
As one trader put it to me this week: "It's like investors are parked on the side of the road waiting patiently, in the cold, for the fog to lift from the highway."
AMP's Shane Oliver helps manage billions of dollars for the superannuation giant.
"President Trump's tariffs remain a source of ongoing uncertainty," he says.
Just in the last two weeks, Trump announced a 25 per cent tariff on smart phones and threatened a 50 per cent tariff on European goods from June, then delayed it until July 9.
And this is where concerns around the US dollar's longer-term trajectory come in.
The US dollar is inextricably linked to the quality of the US government debt.
Oliver is concerned the US government is careening toward a debt crisis.
"Higher bond yields since the pandemic have pushed US federal interest payments to a record 18 per cent of tax revenue," he says.
Higher US government bond yields, or debt, points to rising nerves about the US government's fiscal position.
The US dollar index, which is a measure of the US dollar's value against a basket of currencies, hit a three-year low this week
If, as Oliver suggests, the US dollar is losing its post-World War II safe haven status, it will continue to decline in value.
"It's possible that the US dollar is losing its 'safe haven' status that could see it fall rather than go up in a crisis."
Oliver is referring here to the potential for a US debt crisis.
"This means the Australian dollar may behave a bit less as a shock absorber in a crisis by not falling as much as would normally be the case," he says.
"Time will tell, but if this is the case then more of the burden could fall on the RBA to help protect the economy in rough times by cutting interest rates by more."
This is potentially a double win for many Australians.
It could make overseas travel less expensive as the Australian dollar appreciates against the greenback.
There could also be further relief for mortgage borrowers as the Reserve Bank lowers interest rates to counterbalance rising global interest rates.
But it would be a blow for export-exposed industries, who are hit with a potential double-whammy of falling global demand and a less competitive exchange rate.
Others view the US economy, and its international reputation as largely untouchable.
"I cannot see a world where the US dollar is not the reserve currency of global flows," Jamieson Coote Bond's James Wilson says.
However, as InTouch Capital Markets senior analyst Sean Callow points out, other currencies like the yuan and the euro are keen to move towards the top of the currency podium.
"The greenback seems likely to remain dominant in global trade in commodities and many financial contracts, where deep market liquidity is precious," Callow says.
"But just as the US relationship with Europe will probably never be the same, the euro is becoming more attractive as a reserve currency, largely at the dollar's expense."
It's a rocky road for global financial markets and most are treading very carefully.
The uncertainty stems from US economic policy confusion and chaos, which may not go unpunished by investors.
Though there is potential for significant upsides for many Australians.