‘Buckle up’: Aussie dollar plummets as US-China trade war lets rip

The Australian dollar has fallen to its lowest point in five years as a trade war between the country’s largest economic partners – China and the United States – reaches a fever pitch.

Trading at just US59.33¢ on Monday morning, the dollar recovered to just over US60¢ by the afternoon as expectations rose of further instability in a trade war sparked by Donald Trump’s “Liberation Day” tariffs.

On Friday, China slapped a uniform 34 per cent tariff on US imports, spooking the Australian market and lowering the dollar to levels not seen since the global financial crisis and the COVID-19 pandemic.

Why is the Australian dollar falling?

Rodrigo Catril, senior foreign exchange strategist at NAB, said that the Australian dollar is “in no man’s land” as trade tensions between the US and China become more volatile. Catril said that the risks of a “systemic shock” caused by trade tensions was increasing, and that the dollar “never performs well” in such circumstances.

Catril said that there was some room for optimism, but a “true to form” Trump administration could bring about an expanded trade war with China in which markets could “get a little bit worse before they get better. We need to buckle up and brace for a little bit of volatility.”

As major international players such as the European Union plan to respond to Trump’s tariffs, a broadening of tactics is expected.

“The scope of tariffs is probably a bit narrow – we really should probably be talking about trade tensions … that’s where we can talk about tariffs on services, or restrictions to sectors, or financial access and so on,” said Catril.

“The general sense is that Europe is, at the moment, more inclined to negotiate first and then look to retaliate afterwards if negotiations fail,” said Catril. “Europe is talking about the idea of imposing tariffs on services, which of course is where big tech in the US has quite a bit of exposure to Europe.”