There was a bittersweet irony in the news.

The worst two-month slump in retail sales in seven years finally exposed the vulnerable underbelly of an economy that has been running on high octane fumes from a mountain of household debt.

The verdict from the nation's top economists was almost universal, delivered in uncharacteristically colourful language with terms such as "unexpectedly cratered" and "a shocker".

It was the decisive factor that sent the Aussie dollar into a spiral on Thursday, piercing through 78 US cents; a welcome decline that must have cheered Reserve Bank supremo Phil Lowe in his Martin Place eyrie.

All year, Mr Lowe persistently has bemoaned the strength of the currency, how it was weighing on economic growth and employment.

That it took such dire numbers on retail sales to jolt market traders — who just weeks ago had their sights set on a run towards 90 US cents — would give no real comfort.

Why everyone wants a weaker currency

Way back in the dim dark ages, a strong currency was a matter of national pride. Opposition leaders would berate and chide a government that presided over a weakening dollar.

Not any more. The "mine's bigger than yours" mentality went out of style in the 90s when politicians began ceding control of the economy to central bankers who had no qualms about engineering a weaker currency when they wanted to boost growth.

Exports are cheaper and consumption shifts to domestically produced goods

That worked well when individual countries responded to domestic troubles. But when the financial crisis a decade ago simultaneously delivered every major developed country to the brink of ruin, central banks from Washington to Tokyo, to Brussels and beyond pulled out all stops to achieve an advantage over the others.

They flooded the globe with cash. They pushed interest rates into negative territory. It was a war in a zero-sum game where there could be no winners.

Australia was a major casualty of that war. As the financial crisis threatened to pull us into the vortex, our currency plunged from parity against the US dollar to about 60 US cents in just six weeks.

It was a circuit breaker that delivered a jolt to the economy's heart.

But it was short-lived. Just as the US, Europe and Japan undercut their currencies, China's debt-fuelled investment spree gathered pace, boosting our exports and commodity prices, prompting vast amounts of investment cash to flood in.

That pushed the Aussie battler to a post float record of $US1.10, a move that hollowed out our industry and changed the country forever.

While the Reserve Bank boffins now reassure us that our "economic transition" from the mining boom is almost complete, what they secretly desire is a dollar that is more like a South Pacific peso; one that sits well below 70 US cents, that would boost national income and fuel some inflation.

Here are three reasons why the dollar just may sink.

1. Interest rates are going nowhere

A few months back, as the US Federal Reserve continued its snail-paced advance into positive territory, the European Union hinted it too may turn off the money printing machines and nudge rates northward.

Then Canada pushed through two hikes in quick succession.

Suddenly, almost every senior local economist became convinced we would be forced to follow suit, which helped propel our currency through 81 US cents.

As your correspondent argued at the time, they were dreaming.

For what they overlooked was the terrible burden our uber-expensive housing has placed upon the economy.

Australia's household debt has increased at a greater rate than income or assets. ( Supplied: ABS )

Australian households hold a monumental debt of 189 per cent of income, about the highest in the world.

Most of that is secured against housing. Wages growth, meanwhile, is at a record low, meaning households either must cut into savings to fund their purchases or pull in the purse strings.

As last week's retail sales figures confirmed, the latter now is in full swing, threatening to punch a hole in economic growth forecasts.

The RBA is now stuck in limbo. It has a mandate to maintain price stability, to keep inflation under control.

Normally, that means acting ahead of the curve, whacking up rates before inflationary pressures build.

Not this time. It will have to let inflation run, to allow incomes to catch up with debt.

Rather than be pressured into raising rates, it may even have to cut further although it would be constrained by a fear that it may add further fuel to housing prices.

That reality has begun to dawn on currency traders. With no lift in rates for the foreseeable future, the dollar will remain under pressure.

2. Our interest rate premium is eroding

Traditionally, Australian interest rates have been higher than other major global players. That is because we have always imported capital to fund our investment.

Australia's low interest rates are now almost on-par with those in the US. ( Supplied: RBA )

Those higher rates have attracted global funds looking for a safe home with solid returns. And that fund inflow has kept our dollar strong.

In 2011, as the US went to zero and Europe plunged into negative interest rates, we began raising ours, with official cash at 4.75 per cent.

Now, we have whittled that premium down to a whisker. Our official cash is at 1.5 per cent while the US is at 1.25 per cent with another US rate rise due before Christmas and possibly two next year.

That hefty premium has evaporated. Once we slip behind US rates, global cash will look for a home elsewhere. And that means our dollar will sag.

3. Our commodity prices are weakening

The mining boom may be over but we rely as much as ever on the export of dirt; red dirt rich in iron to be precise.

As the Reserve Bank governor noted last month in the minutes to the September meeting — where rates were kept on hold — iron prices appear destined to slide.

Demand from China appears to have peaked and new iron ore supply is coming on stream.

It was a prescient comment. In the past month, global iron ore prices have slumped 23 per cent, after a strong rally in previous months, and look set to break below $US60 a tonne.

The Australian dollar is a commodity currency. A big shift south in the price of iron ore will weigh heavily on it.

What will happen if the dollar does sink?

A weaker currency will shield us from the worst effects of a commodity price slump. What we lose on the US dollar price of iron ore, we pick up through the weaker Aussie dollar.

It will also make local industry more competitive. In addition to making our exports cheaper, the price of imported goods will rise, delivering a boost to local manufacturers and service providers.

That raises the cost of living, which in the not so distant past, was considered the great economic evil.

Not any longer. Inflation is too low. Those higher prices, if the theory is correct, eventually should flow through to wages which just may give us some breathing space to catch up on that massive increase in household debt.

A weaker dollar is vital element to help us avoid a serious downturn. That, plus a slight weakening in capital city housing prices, a jump in wages and a curb on debt growth.

What are the chances?