The Australian dollar has experienced a sharp decline, reaching its lowest value in two years, while the local stock market also saw significant losses. This downturn is primarily attributed to the US Federal Reserve's recent interest rate adjustments and their subsequent impact on global markets.
The Australian dollar weakened considerably, trading at approximately 62 US cents by midday today. This marks the lowest exchange rate since October 2022. Furthermore, the currency also fell below the 50 pence mark against the British pound, a level not seen since the beginning of the COVID-19 pandemic, reflecting broad weakness against major currencies.
Adding to the economic pressure, the Australian sharemarket also suffered substantial losses. The ASX200 index dropped by 1.7 percent by midday, reaching its lowest point since early November. This market downturn mirrored the global financial reaction to the US Federal Reserve's actions.
The Federal Reserve's decision to cut interest rates by 0.25 percent, its third such reduction this year, was a major factor in the market volatility. However, the Fed also indicated a slower pace of rate cuts for the coming year, forecasting only two cuts instead of the previously anticipated four. This revised outlook contributed to a market sell-off.
According to Federal Reserve Chair Jerome Powell, this slower pace of cuts reflected both higher inflation readings this year and expectations of higher inflation in 2025. Powell’s statement emphasized that the US central bank is approaching a neutral rate, thus requiring greater caution about future rate adjustments.
The market’s response was swift and severe. Wall Street experienced its worst day in four months, with the Dow Jones Industrial Average plummeting by over 1100 points, roughly 2.5 percent. The Nasdaq composite was hit even harder, declining by approximately 3.5 percent on Wednesday.
These significant losses reverberated through the global markets, impacting Australian investors as well. Following a slight dip yesterday, the Australian stock exchange experienced a much more substantial fall today, reflecting the contagion of the market's negative sentiment.
Despite the overall negative trend, there was a single positive development for the Australian dollar. It rose sharply against the New Zealand dollar, which was heavily impacted by the news that New Zealand’s economy had entered a recession following a 1 percent GDP contraction in the September quarter. This highlights the uneven impact of global market conditions on different economies.
