The Reserve Bank cut interest rates earlier this month in part because it was worried about the risk of a “severe downside scenario” for global trade.
Economists say that risk just increased with a recent steep fall in the value of the US dollar — the fallout of which all Australians could feel.
The US dollar, the world’s reserve currency, has been hovering around a 3-year low and its steep decline has veteran economist Saul Eslake worried.
“The reason for the decline in the US dollar is that financial markets are becoming increasingly apprehensive about a number of aspects of the US economy as a result of things that the Trump regime is doing,” he told the ABC.
They include sweeping tariffs imposed on many of its trading partners, and the potential passing of the so-called Big Beautiful Bill, which could see US debt rise significantly over the next decade.
The apprehension is also showing up in higher long-term US interest rates, including the 30-year government bond rate, which is now roughly 5 per cent.
Bond yields or interest rates rise when investors demand a higher return for debt that has become riskier, or more challenging for the borrower to repay.
It has led to the end, for now, of a close correlation between the US dollar and US long-term interest rates.
The two are now diverging.
The historical ties between US bond yields and the dollar have been broken. (ABC News)
“Apprehension is probably putting it at its mildest,” Mr Eslake said.
“In some quarters, there is, if not panic, then certainly alarm [about rising bond yields].”
The distress relates to the connection between elevated long-term bond interest rates and the rising cost of millions of American mortgages.
The risk, Mr Eslake says, is that enormous numbers of Americans could begin to struggle to service their mortgage repayments.
“With the 30-year bond yield in the US now higher than at any time since before the global financial crisis, that means that even though inflation is coming down, in the US, at least, until Trump’s tariffs come into effect, bond yields and mortgage rates are going up.”
This, he says, could seriously harm the world’s biggest economy.
Australian mortgage borrowers on fixed-interest loans are, Mr Eslake says, also in the firing line.
“Because although our mortgages tend to price off the Reserve Bank’s official cash rate, fixed rates for mortgages and for business loans, the longer out you go, the more influenced they are by US government bond yields.”
The falling US dollar, analysts say, is also pushing the Australian dollar higher.
While that’s good news for Australian travellers, FNArena’s Danielle Ecuyer says it is a risk for anyone holding US investments.
And that includes Australians with superannuation.
“We know that a lot of Australian investors have been piling into US stocks and the one thing that I think probably a lot of them aren’t even taking into account is even though [US stocks have performed well], over the same period the Australian dollar has actually gone up 10 per cent,” she said.
“So, in Australian dollar terms, you can say you’re basically losing that 10 per cent on your performance.
“The problem is, the US dollar’s going down, so in Australian currency terms, you’re not doing as well.“
Mr Eslake sees financial dangers for the US economy rising.
That is because the cost of US government debt, he says, is higher than America’s economic growth rate which, he points out, can make servicing government debt incredibly challenging.
“And history tells you in those circumstances that, especially if governments continue to run big budget deficits, as the US is planning to do, that can actually lead to exponential growth in government public debt,” he says.
“At its most extreme example, that’s what happened to Greece 13 years ago.
“Now, the US is nowhere near where Greece is, but it’s heading in that direction.”
Official inflation data will be released later on Wednesday, which, if low enough, could open the door to some additional mortgage relief for Australian mortgage borrowers on variable interest rates.
