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Aussie Dollar Nears Decade Low as Jobs, U.S.-China Trade Fight Take Toll

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05/16/2019 | 05:12am EDT

By James Glynn

SYDNEY--The Australian dollar is approaching its lowest level against its U.S. counterpart since the financial crisis a decade ago, as signs of weakness in the local jobs market added to concerns that China's economy could be roiled by American tariff increases.

The Aussie, as it is known colloquially, has fallen 10% in value in nearly a year as the U.S. took aim at more and more Chinese imports. In the latest tit-for-tat measures, China this week detailed its plan to raise tariffs to as high as 25% on US$60 billion worth of U.S. imports, in response to the U.S. increasing tariffs on US$200 billion worth of Chinese goods.

Australia is vulnerable to trade shifts as China buys about a quarter of its exports, especially industrial commodities such as iron ore and coal. A weaker Chinese economy would pressure commodity prices and the Aussie dollar, unless Beijing copies its response to the financial crisis and spends big on infrastructure to reignite growth. Iron-ore prices are a bright spot right now, helped by production cuts in Brazil following a deadly dam spill.

The Australian dollar hit a low of US$0.6891 on Thursday, putting it within a whisker of the US$0.6867 close reached on Jan. 15, 2016. If the dollar breaches that, it would be hitting lows last seen in 2009.

The immediate trigger for Thursday's fall was a lackluster jobs report that highlights growing risks to Australia's 27-year run without a recession. Australia added more jobs than expected in April, but these were part-time roles that more than offset a fall in full-time positions. The unemployment rate unexpectedly lifted to 5.2% from an upwardly revised 5.1% in March.

The jobs figures accelerated bets that the Reserve Bank of Australia will cut interest rates to safeguard the economy and improve the chances that inflation will return to its target band of 2% to 3% over time. Market pricing of a rate cut when the central bank next meets in early June rose to 60% from 40% just before the release of the employment data.

HSBC hadn't expected the central bank to bring rates down from a record-low 1.50%, but reversed that call on Thursday given the worsening outlook for Australia's jobs market and U.S.-China trade tensions. It now forecasts a quarter-point cut in June and another in August. "There is little reason to wait," said Paul Bloxham, the bank's chief economist for Australia and New Zealand.

RBC Capital Markets also said labor-market trends underscore that it is "a matter of when, not if" the Reserve Bank of Australia acts by lowering rates, given the central bank has gone to great lengths to emphasize that these are its top concern.

The slackening in the jobs market adds to warning signs about Australia's economy, with growth slowing since the middle of last year.

Consumer prices were flat in the first three months of the year, and core inflation slipped further below the central bank's target range. Meanwhile, house prices are in their worst slump in a decade, prompting homeowners to spend less on big-ticket items such as sofas and new cars.

Write to James Glynn at james.glynn@wsj.com

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