The truth behind the continuous depreciation of the Australian dollar: a decade-long decline and the potential for future reversal

The Australian Dollar (AUD) is among the top five most traded currencies globally. The AUD/USD currency pair boasts high liquidity and low spreads, making it a common target for investors engaging in short-term trading or medium-term positioning. However, the once-lauded “high-yield currency” of the AUD has underperformed over the past decade.

Over 35% Depreciation in the AUD Over Ten Years: Victim of the Strong Dollar Cycle

Since early 2013, the AUD has depreciated by over 35% against the US dollar, while the US Dollar Index (DXY) has risen by 28.35% during the same period. This is not unique to the AUD—major currencies like the euro, yen, and Canadian dollar have also depreciated against the dollar, reflecting a comprehensive strong dollar cycle dominating global currency revaluation.

Looking at a more detailed historical perspective, the AUD’s movements are closely linked to three major factors:

2009-2011: China’s robust economic recovery drove demand for commodities, with Australian interest rates significantly higher than those in the US, pushing the AUD close to 1.05.

2020-2022: During the pandemic, Australia’s stable containment measures, strong demand for iron ore in Asia, and rapid rate hikes by the Reserve Bank of Australia (RBA) caused the AUD to briefly break above 0.80.

2023-2024: China’s sluggish recovery, global commodity price fluctuations, and narrowing interest rate differentials have kept the AUD generally weak.

This process clearly indicates that whenever the AUD approaches previous highs, market selling pressure increases, reflecting limited confidence in the currency.

Why Is the AUD Struggling to Turn Around: Three Major Dilemmas

The fundamental reasons for the AUD’s weakness are not complex, but they are not easily changed overnight:

First, the fate of commodity currencies. Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. Rising US tariffs and trade tensions have slowed global trade, reducing raw material exports and directly weakening the AUD’s commodity currency status. When China’s infrastructure and manufacturing activities underperform, even short-term rebounds in commodities often lead to “spikes followed by declines” in the AUD.

Second, the diminishing interest rate advantage. The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Although markets expect another rate hike possibly reaching 3.85% by 2026 (according to the Federal Reserve’s forecasts), the interest rate gap with the US has narrowed significantly, reducing the appeal of the AUD as a high-yield currency.

Third, declining domestic economic attractiveness. Australia’s domestic growth remains sluggish, and asset attractiveness is limited, making it difficult to attract long-term capital inflows. Without clear growth momentum or interest rate advantages, the AUD’s movements are more influenced by external factors rather than fundamentals.

Three Key Factors Determining the Medium- to Long-term Trend of the AUD

Investors seeking to grasp the AUD’s turning points should monitor three interconnected indicators:

1. RBA Monetary Policy: Is the interest rate differential being rebuilt?

The RBA’s interest rate decisions directly impact the AUD’s attractiveness. If inflation remains sticky and the labor market stays resilient, maintaining a hawkish stance will help restore the interest rate advantage; otherwise, if rate hikes fall short, the AUD’s support will weaken.

2. China’s Economy and Commodity Prices: External drivers of the AUD

As a commodity currency, the AUD is highly correlated with iron ore, coal, and other raw material prices. When China’s infrastructure and manufacturing activities rebound, commodity prices tend to strengthen simultaneously, and the AUD usually reflects this quickly in the exchange rate. Therefore, Chinese demand is a core variable in assessing the medium-term trend of the AUD.

3. US Dollar Trends and Global Risk Sentiment: Capital flow determinants

The Federal Reserve’s policy cycle remains central to the global FX market. In a rate-cutting environment, a weakening dollar generally benefits risk currencies like the AUD; however, if risk aversion rises and capital flows back into the dollar, the AUD can be pressured even if fundamentals are stable. Given current energy prices and global demand remain cautious, investors tend to favor safe-haven assets, limiting the AUD’s upside.

In summary, for the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA shifts back to a hawkish stance, Chinese demand substantively improves, and the dollar enters a structural weakening phase. If only one of these is present, the AUD is more likely to remain in a range-bound oscillation rather than a one-way rally.

Diverging Institutional Forecasts: Can the AUD Break the Deadlock?

Market analyses show significant disagreement on the future trajectory of the AUD.

Optimistic views suggest that a soft landing of the US economy and a decline in the dollar index will benefit commodity currencies. Morgan Stanley projects the AUD/USD could rise to 0.72 by the end of 2025, mainly based on the potential for the RBA to maintain a hawkish stance and for commodity prices to strengthen. The Traders Union’s statistical model indicates 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 a recovery in commodity demand.

Cautious forecasts warn of risks. UBS believes that despite resilience in Australia’s economy, global trade uncertainties and Fed policy shifts could limit the upside, with the AUD expected to stay around 0.68 by year-end. Commonwealth Bank economists are more cautious, suggesting the AUD’s recovery may be temporary, with a forecast high around March 2026 and potential retracement by year’s end. Some Wall Street analysts also warn that if the US avoids recession but the dollar remains super-strong, the AUD will struggle to break through 0.67.

Market consensus points to: 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 payrolls. The AUD is unlikely to fall sharply because of Australia’s solid fundamentals and a relatively hawkish RBA, but a significant rally is also unlikely due to structural dollar strength. Short-term pressures mainly stem from Chinese data releases, while long-term upside hinges on a potential recovery in Australia’s resource exports and the global commodities cycle.

Structural Outlook on the AUD’s Trend

As a “commodity currency” of a major resource-exporting country, the AUD’s characteristics remain prominent, maintaining a high correlation with prices of copper, iron ore, coal, and other raw materials.

Based on comprehensive market analysis, in the short term, the hawkish stance of the RBA and strong commodity prices will provide support. However, in the medium to long term, global economic uncertainties and the risk of a dollar rebound should be watched, as these factors will limit the AUD’s upside and may lead to continued volatility.

Although FX markets are volatile and difficult to predict precisely, the AUD’s high liquidity, predictable volatility patterns, and clear economic structure make medium- to long-term trend assessments relatively straightforward. Whether for short-term traders or medium-term investors, understanding these fundamental dynamics will help better identify opportunities and risks in the AUD.