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Australian dollar decline holds best hope for economy to escape trade war fallout

A US one dollar bill sits with Australian currency

Market watchers are growing increasingly worried about the escalating trade war between the United States and China.

Key points:The Australian dollar has been within 10 basis points of its decade low of 67.41 US cents, set in a flash crash on January 3 this yearA 20 per cent slump in iron ore prices has contributed to the Aussie dollar's slideEconomists say the lower dollar should provide a boost to export earnings, especially in industries like tourism and education

US President Donald Trump vowed last week to impose 10 per cent tariffs on the remaining $US300 billion ($441 billion) of Chinese imports that are not currently subject to tariffs from the September 1.

China has since retaliated by devaluing the yuan to its lowest level in more than a decade.

Financial markets have not taken the news well, sending share markets across the globe sharply lower and pushing the price of an Australian 10-year bond — considered a safe haven asset — to a record high.

As a result, the yield (or percentage return) on the 10-year bond has fallen to a record low.

External Link: Australian 10-year bond yield

"I think it's a sign of just how badly things have deteriorated," senior Westpac currency strategist Sean Callow said.

But he also said a lower Australian dollar would provide the economy with a bit of a financial cushion at a critical time.

"For those who are visiting, with their stronger currency, they may go for that fancier dinner, or a bridge climb, or stay at a posher hotel, or whatever it may be, so tourism is definitely one of the beneficiaries of the weaker dollar," Mr Callow observed.

The latest trade figures from the Bureau of Statistics show the lower dollar is already bringing plenty more cash into the economy.

Australia's trade surplus rose 30 per cent in the three months to June, meaning more money is coming into the economy than going out.

American tourist Mary Schrader is in Uluru with her family enjoying some of the best experiences Australia has to offer.

US tourist Mary Shrader at Uluru riding a camel.

"Oh my gosh, it's just so beautiful, and the people are lovely, and it's just gorgeous," she said.

"It's cultural, it's spiritual, there's nature, there's so much to do, and there are many active adventures.

"It's kind of a little bit of everything we love."

Ms Schrader has already climbed the Sydney Harbour Bridge.

She told PM she would spend even more in Australia if the US dollar continued to rise against the Australian dollar.

"Now that you mention it, you know, we were looking at some artwork that we may able to spend on now," she said.

There could be even more money heading to Australia, according to anecdotes from the tourism sector.

Head of sales and marketing at Sydney's Bridge Climb, Jordana Kirby, told the ABC they were already seeing more bookings from the United States as a result of the lower Australian dollar.

"Our forward bookings are looking very strong, especially for the leisure market and US travellers," she said.

PM asked Ms Kirby if the increase in bookings could be traced back to the falling Australian dollar against the greenback.

"I suspect it would, especially if our forward bookings are anything to go by," she said.

Government should invest iron 'lotto' winnings in stimulus

However, another asset critical to Australia's economic prospects is also falling in value.

A key Chinese iron ore spot price is currently trading under $US100 per tonne. It was above $US120 per tonne in July.

"I do see prices coming off," Mine Life senior resources analyst Gaven Wendt told the ABC.

He said the price of iron ore was falling because there were fears the US-China trade war would accelerate China's economic slowdown, meaning it would ultimately buy less of the commodity.

"We're going to see prices trading in that $US75 to $US100 per tonne range for the next few months, and then maybe settling down in terms of the six months outlook somewhere between $US50 to $US75 per tonne range," he said.

While the falling Australian dollar will provide some support for the economy, the falling iron ore price — while contributing to a weaker dollar — will ultimately weaken the economy further.

However, while the price of iron ore has fallen roughly 20 per cent from its July peak, it is still well above the price Treasury assumed it would be this year in its budget forecasts.

National Australia Bank chief economist Alan Oster said Australia has been presented with a brief window to "strike" with economic stimulus to prevent the entire economy from stalling.

"Basically, in very simple terms, the Government won cash lotto this year," he said.

"Now, should they take some of that cash lotto winnings, and try and boost the short-term outlook for the economy? We think they should.

"What becomes tricky is when you don't use some of that increased revenue from iron ore, the economy might actually stall."

PM asked the Treasurer Josh Frydenberg whether he would need to tweak the budget to take account of the falling iron ore price.

In a statement the Treasurer simply said, "the budget gets updated twice a year. Once at budget and once at MYEFO".

In the meantime, market watchers are counting on the Australian dollar staying lower for longer.

External Link: Australain dollar

"I think the Aussie will stay lower," Mr Callow said.

"In the 60s I'd say [against the US dollar]. It's probably going to stay there into next year.

"So that's going to be a positive for, say, international student registrations and ongoing support for tourism."

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