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Australian dollar drops on US economy outlook

Australian dollar drops on US economy outlook

The Australian dollar has weakened against a stronger US dollar since President-elect Donald Trump pledged to grow the US economy by 4% a year once he takes office.

The Australian dollar has fallen to 73.20 US cents today from 77.62 US cents - a six-month high hit just before the 8 November election in the United States.

CommBank currency analysts have upgraded their US economy growth forecasts for 2017 from 1.7% to 2.3% following the vote this month that will put Donald Trump in the White House as the 45th US President from January 2017.

President-elect Trump has said he wants to boost the US economy and hit 4% growth a year, twice as fast as the average rate of growth since the US economy emerged from recession in 2009.

CommBank said Trump's proposed pump-priming, including plans to increase spending on the military and cut personal income and corporate taxes to boost consumer spending and business investment, might spur rapid growth in the US economy in the next few years.

"We project US GDP [gross domestic product] growth of 2.6% in 2018," the analysts said in a note. This forecast above-potential growth rate would "cause US inflation to rise further".

With these GDP forecasts and expectations of US dollar (USD) gains of up to 10%, "we expect the FOMC [US Federal Reserve's Federal Open Market Committee] to increase the funds rate by 0.50% in 2017 (to 1.00-1.75%) and a further 0.50% in 2018 (to 1.5-1.75%)".

"US GDP growth of 3-4% is possible, but it would not be sustainable, because inflation and the USD would surge and the FOMC would respond with much higher interest rates," CommBank said.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance.