Why is the Australian dollar falling and could it affect rate cuts?

Economists at the nation’s big four banks have predicted that the Reserve Bank of Australia (RBA) will cut the cash rate in the first half of 2025, potentially as soon as February. This would mean much-needed relief for home loan borrowers, with banks and lenders likely to cut their own variable rates in response. That said, rate cuts are far from a done deal, and current exchange rate woes with the US has some concerned that they could be postponed indefinitely.

Earlier this week, the Australian dollar dropped to around 61.44 US cents, which is its lowest level since April 2020, in the early days of the pandemic. This represents a significant drop in a short space of time — in mid-December, the Aussie dollar was trading above 64 US cents, and in September, it was above 69 US cents. This equates to a fall of around 9% in the past three months. So why is this happening, and what could it mean for borrowers?

Why is the Australian dollar falling?

The current fall in the Australian dollar has been attributed to a recent spike in the US dollar, which recently hit a two-year high thanks to strong employment figures out of the country. Per reports from the US Bureau of Labor Statistics, the country added 256,000 jobs in December, and the unemployment rate fell to 4.1%. These stronger than expected figures, which were around 90,000 more jobs than forecast, gave the US economy a boost in the final days of the Biden administration.

Westpac economist Jameson Coombs told ABC News that falls in the Aussie dollar are attributable to this unexpected employment boom in the US, as well as other broad existential factors. Uncertainty about the effect of Donald Trump’s planned tariffs, Chinese economic growth, and “repricing in domestic interest rate expectations” are also influencing the current slump in our currency. These combined forces, said Coombs, leave “little room” for resurgence for the low Australian dollar, at least in the short term.

Could the falling Australian dollar postpone rate cuts?

At this stage, two of Australia’s big four banks are predicting that we will see the RBA cut rates in February — ANZ and Commonwealth Bank are both making this call, with NAB and Westpac forecasting that we will see cuts by May. Economists at all four banks predict that promising inflation figures will lead to rate relief, but some have warned that the low Aussie dollar could be enough to stay the RBA’s hand, potentially dashing hopes of a cut in February.

Speaking to Sky News this week, EQ chief economist Warren Hogan said that, while the RBA is not directly concerned with the level of our currency, a weak Aussie dollar could lead to a rise in the price of imports like motor vehicles and other consumer goods, thereby raising inflation. “I think that’s the thing that’s going to worry them,” Hogan told the broadcaster. “I think it’s just another reason not to cut interest rates in February, and I don’t think they will.”

The economists went on to say that, in his view, the RBA does not currently have an economic reason to cut, and that while we may yet see rates slashed later in the year, the central bank may well keep holding for now.

Housing costs top Aussies’ list of worries

While the low Australian dollar is the latest of the nation’s concerns, Canstar’s recent Consumer Pulse Survey found that housing costs top the list of the nation’s worries for 2025. A survey of 2,000 Aussies found that of those with an owner-occupier mortgage, only 60% feel prepared for housing costs to remain at their current level this year, with 40% saying that they are unprepared or unsure whether they will be able to continue making repayments at the current level.

Of those who are unprepared or unsure, 72% said that they would consider cutting back further on other living costs to keep paying their mortgage, while 16% said that they may need to sell their property in 2025. Around 10% of those surveyed said that they might also consider options like seeking help from family and friends or applying for hardship assistance from their lender to make ends meet — a concerning insight into the effect of the cost of living crisis on Aussie borrowers.

If you’re looking to refinance your home loan or wondering if you could get a better rate than what you’re currently paying, you can compare home loans with Canstar to give you an idea of what’s out there on the market.

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