Why has the Australian dollar weakened over the past decade? 2026 AUD exchange rate forecast and investment analysis

AUD has fallen over 35% in ten years; a strong dollar cycle remains the main driver

The Australian dollar is the fifth-largest currency by global trading volume (after USD, EUR, JPY, GBP), and the AUD/USD currency pair ranks among the top five most actively traded pairs worldwide, attracting many investors for short-term or medium-to-long-term positioning due to its liquidity and low spreads. However, despite the AUD being traditionally viewed as a high-yield currency and a primary target for carry trades, its overall performance over the past decade has been quite disappointing.

From an initial level of 1.05 in early 2013 to the end of 2023, the AUD/USD has declined by over 35%, while the US dollar index (DXY) has risen by 28.35%. Notably, other major currencies such as the euro, yen, and Canadian dollar have also depreciated against the dollar, reflecting a comprehensive strong dollar cycle underway. Against this backdrop, the AUD’s weakness has become even more apparent—both technical trends and fundamental news point to disadvantages for the AUD, and even occasional rebounds have struggled to establish a sustained upward trend.

The pandemic period in 2020 was an exception. At that time, Australia managed to control the pandemic effectively, demand for commodities like iron ore in Asian markets was strong, and the Reserve Bank of Australia’s (RBA) policy support drove the AUD to rise sharply by about 38% within a year. Unfortunately, this rally was short-lived, and since then, the AUD has mostly traded sideways or remained weak. It was only in the second half of 2025, when iron ore and gold prices surged and the Fed cut interest rates, prompting capital flows into risk assets, that the AUD rebounded, briefly reaching 0.6636. Over the entire 2025 period, the AUD appreciated about 5-7% against the dollar, but on a longer-term scale, its overall weakness remains unchanged.

Diminishing interest rate advantage and declining commodity demand spell long-term trouble for the AUD

Whenever the AUD approaches previous highs, the market tends to see significant selling pressure, indicating limited investor confidence in the currency. Analysis suggests that the main reasons for the persistent weakness of the AUD include:

First, US tariff policies impact global trade. The decline in raw material exports (metals, energy) directly weakens the AUD’s support as a commodity currency.

Second, the interest rate differential between Australia and the US remains difficult to reverse. Australia’s sluggish economy results in less attractive assets, failing to attract sufficient hot money inflows.

Third, external factors dominate the trend. In the absence of clear growth momentum and interest rate advantages, the AUD’s movement is more susceptible to external shocks rather than its own fundamentals, which is the core reason for market caution toward the AUD.

In short, the AUD currently resembles a “rebound but lacking a trend” currency—frequent short-term fluctuations and no intrinsic upward momentum in the medium to long term.

Three key factors to monitor for the medium- and long-term trend of the AUD

To assess whether the AUD has the potential for sustained appreciation, investors should focus on the following three core variables, whose interaction determines the medium- and long-term direction of the currency:

1. RBA interest rate policy: Will the interest rate differential regain its advantage?

The Reserve Bank of Australia (RBA)’s cash rate is currently around 3.60%. The market has gradually priced in the possibility of another rate hike by 2026, with Commonwealth Bank of Australia (CBA) forecasting a peak rate potentially reaching 3.85%. If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA could help rebuild the interest rate advantage for the AUD; conversely, if rate hike expectations fade, the AUD’s support will weaken significantly.

2. China’s economy and commodity prices: External drivers for the AUD

Australia’s exports are highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. China’s demand is the most critical variable—when China’s infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen, and the AUD usually reflects this quickly in the exchange rate; if China’s recovery falters, even a short-term commodity rally may be followed by a pullback in the AUD.

3. USD trend and global risk sentiment: Capital flow determinants

The Federal Reserve’s policy cycle remains central to the global FX market. In a rate-cut environment, a weaker dollar generally benefits risk currencies, including the AUD; however, if risk aversion rises and capital flows back into the dollar, the AUD can weaken even if its fundamentals are stable. Recent energy prices and global demand remain cautious, and investors tend to favor safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

For the AUD to truly enter a medium- to long-term bull phase, three conditions must be met simultaneously: the RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the dollar. If only one of these is present, the AUD is more likely to remain range-bound rather than trend higher.

2026 AUD/USD outlook: Can a rebound turn into a trend?

The key to the AUD’s future trajectory is whether the “rebound can turn into a trend.” Most market analysts agree that: while the AUD has room for short-term recovery, a sustained bullish trend requires clearer macroeconomic conditions.

Major institutions’ outlooks vary:

Morgan Stanley expects the AUD/USD to rise to 0.72 by the end of 2025, mainly supported by the RBA’s hawkish stance and rising commodity prices.

Traders Union’s model projects an average of about 0.6875 by the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by the end of 2027, emphasizing strong Australian labor markets and commodity demand recovery. The common basis for these optimistic forecasts is that if the US economy soft-lands and the dollar index declines, it will favor commodity currencies like the AUD.

UBS adopts a more conservative view, believing that despite Australia’s resilient economy, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with an expected exchange rate around 0.68 by year-end.

CBA economists recently expressed a more cautious outlook, suggesting the AUD’s recovery might be short-lived. They forecast the AUD/USD to peak around March 2026 but possibly fall back again by year-end.

Some Wall Street analysts warn that if the US avoids recession but the dollar remains super-strong due to interest rate differentials, the AUD will struggle to break resistance at 0.67.

In my personal view, in the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by Chinese data and US non-farm payroll fluctuations. The AUD is unlikely to crash sharply because Australia’s fundamentals remain solid and the RBA remains relatively hawkish; but it also won’t surge to 0.75 or higher, given the structural dollar advantage. Short-term pressures mainly stem from Chinese data, while long-term positives include resource exports and commodity cycles.

Observation of AUD trend charts and investment implications

The AUD/USD is one of the top five most traded forex pairs globally, and its chart reflects complex fundamental factors. Although currency exchange rates are inherently difficult to predict precisely, the AUD’s high liquidity, volatility patterns, and distinct economic structure make medium- and long-term trend judgments relatively accessible.

As a commodity-exporting country, the AUD’s “commodity currency” attribute remains prominent, especially with strong correlations to copper, iron ore, coal, and other raw material prices. Based on market analysis, in the short term, the hawkish stance of the RBA and rising commodity prices will provide support, but in the medium to long term, global economic uncertainties and potential rebounds in the dollar will limit upside and increase volatility.

Conclusion on AUD trend

While the AUD is highly liquid and actively traded, its current weakness is unlikely to be fundamentally reversed in the near future. Investors should recognize the currency’s intrinsic characteristics and make judgments within the framework of Chinese economic data, the US dollar cycle, and RBA policy stance, rather than blindly chasing short-term rebounds.

Looking beyond 2026, the AUD is more likely to fluctuate within established ranges rather than form a unidirectional rally. For investors monitoring the AUD chart, risk management at key support and resistance levels is essential, along with close attention to Chinese manufacturing PMI, Australian employment data, and Federal Reserve signals—these three indicators will be crucial for assessing the currency’s future direction.