A sizeable portion of Australia's economic policy is influenced several times a year by the stroke of a pen roughly 15,000 kilometres away.

It happened again this week.

When US Federal Reserve chair Jerome Powell signed the paperwork on Thursday to lower the fed funds rate by 0.25 percentage points (25 basis points) at his desk in Washington DC, it set off a chain reaction throughout financial markets the world over.

Why? Well because as the Fed funds rate changes, the values and prices of countless financial products around the world change with it.

It's effectively the world's "benchmark" interest rate.

Within seconds of the announcement, the Australian dollar rose.

It climbed 0.5 per cent. It doesn't sound like much, but in currency markets, that's a significant climb.

The impact on the Australia dollar can be explained this way: as US interest rates fall, Australian savings accounts with their higher interest rates suddenly become more attractive to big financial institutions than their US counterparts.

Of course, in order for global investors to park their money in Australia to take advantage of this, they need to buy Australian dollars in the currency market.

Economy slowing to a pace that's threatening employment

This is precisely what the Reserve Bank does not want to see.

"We live in an interconnected world, which means that we cannot completely insulate ourselves from long-lasting shifts in global interest rates," governor Philip Lowe said in September.

"If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment."

This chart shows how much the Australian dollar can shift based on US monetary policy.

In the wake of the financial crisis, the US government initiated quantitative easing which saw the Federal Reserve buy up billions of dollars' worth government bonds to help slash interest rates more broadly through the economy.

The US fell sharply as a result and the Australian dollar soared to parity against the greenback.

Back then the US wanted lower interest rates and a lower dollar to help provide an economic cushion as credit market froze up.

The US wants to lower the value of its currency as it fights a trade war with China. A lower greenback helps to make its imports into China that little bit cheaper.

Australia's Reserve Bank, on the other hand, wants a lower dollar because the economy is slowing to a pace that's threatening to lead to higher unemployment and more economic malaise (think little chance of landing a pay rise).

The threats to the Australian economy are significant enough to see the Reserve Bank slash the cash rate to the lowest level on record (0.75 per cent).

Australian dollar enters economic danger zone

In "normal" times, that would be more than enough to boost the economy.

However, moves by other central banks to lower their interest rates, and this latest move by the Federal Reserve, throws a spanner in the works.

Economists say every time the Fed funds rate falls, and the Australian dollar rises on the back of it, the associated damage to the Australian economy is the equivalent to the Reserve Bank actually raising the cash rate — an unthinkable policy move in the current climate.

Or as AMP Capital chief economist Shane Oliver puts it, "the rise of the Australian dollar we've seen this month — which is now in excess of three per cent — is a de facto monetary tightening."

Reserve Bank research from 1998 shows that a 3 per cent increase in the exchange rate has the same effect as a one per cent increase in interest rates (four RBA 0.25 percentage point rate increases).

While that modelling hasn't been updated, Shane Oliver says the rise in the Australian dollar we've seen this month has an effect akin to something like a 0.15 to 0.20 per cent rise in interest rates.

JP Morgan Australia chief economist Sally Auld warns the Australian dollar has entered the economic danger zone.

"Were the currency to have a meaningful push above 70 US cents, then I think that would start to become quite concerning for the RBA."

That's because the last thing the economy needs right now is any sort of economic break.

Auld argues as the dollar climbs, jobs could be lost.

Auld argues as the dollar climbs, jobs could be lost. (ABC News: Giulio Saggin)

"The RBA wants stronger [economic] growth, a tighter labour market, they want higher wages, and to get that they need looser financial conditions, and that has to happen through a combination of a lower currency and lower interest rates."

Oliver says the economic damage, as the dollar climbs, would concentrate around sectors that are helping to keep the economy afloat like tertiary education, tourism, manufacturing and mining.

Economic policy in a bit of a bind

The Reserve Bank has the option of lower interest rates again, but recent commentary from governor Philip Lowe suggests he's reluctant to do that — in large part because it encourages already heavily indebted households to take on even more debt.

Modelling from global accounting firm KPMG also shows, at these levels, lowering interest rates further doesn't achieve much.

The US Federal Reserve, however, is expected to cut its cash rate again.

Where does that leave one of Australia's biggest economic policy institutions?

It's effectively hamstrung, or as Auld puts it:

"The Federal Reserve cutting rates is not helping but there's not a lot the RBA can do about that," Auld said.

"If you think of the Federal Reserve as a heavy weight boxer, and the RBA as a bit of a light-weight boxer, it's a slightly unfair competition."

The RBA could engage in a bond-buying program similar to what the Federal Reserve did back in 2008, but that's unchartered territory for the central bank and could have unwanted consequences — like producing another housing bubble, for example.

Assuming little changes on the global economic front, Australian economic policy is in a bit of a bind.