Why has the Australian dollar been weakening in the long term? A look at the historical exchange rates and the potential for future rebound

As the fifth-largest traded currency globally, the Australian dollar (AUD) boasts significant liquidity advantages, yet it has been caught in a persistent depreciation dilemma over the past decade. Since reaching a high of 1.05 in early 2013, the AUD/USD has depreciated by over 35%. What underlying economic factors are hidden behind this decline?

How low can the AUD go? Three periods interpreting the AUD’s weakness history

To understand why the AUD continues to weaken, it is necessary to review the performance comparisons across three key periods:

Phase 1 (2009-2011): The Golden Age of the Commodity Super Cycle
China’s robust economic recovery drove a bull market in commodities, leading to a surge in exports of iron ore and coal from Australia. As a result, the AUD approached its historical high near 1.05. During this period, Australian interest rates were significantly higher than those in the US, making the AUD a “commodity currency” and a “high-yield currency,” attracting hot money.

Phase 2 (2020-2022): The fleeting rebound during the pandemic
During the COVID-19 pandemic in 2020, Australia’s relatively stable pandemic control and strong demand for iron ore from Asian markets jointly pushed the AUD/USD exchange rate up by about 38% within a year, briefly reaching around 0.80. However, this rebound was short-lived, and since then, the AUD has mostly been consolidating.

Phase 3 (2023-2024): Converging interest rate spreads and weak demand
China’s economic recovery has lacked momentum, commodity prices have been under pressure, and the narrowing interest rate gap between Australia and the US has made it difficult for the AUD to sustain high levels. The AUD has repeatedly fallen below 0.65, reflecting persistent market pessimism.

Fundamental reasons for AUD depreciation: a comprehensive decline under the strong dollar cycle

The weakening of the AUD is not an isolated phenomenon. During the same period, the US dollar index rose by 28.35%, and the euro, yen, and Canadian dollar also depreciated against the dollar, forming part of a global strong dollar cycle. Against this backdrop, the AUD faces a threefold squeeze:

1. Commodity cycle weakening
Australia’s export structure is highly concentrated in iron ore, coal, and energy. When Chinese demand weakens, prices for these commodities decline, and the “commodity currency” attribute of the AUD becomes fully apparent, putting downward pressure on the exchange rate.

2. Diminishing interest rate advantage
The Reserve Bank of Australia (RBA) cash rate is approximately 3.60%, with the policy rate gap narrowing against the Federal Reserve. The appeal of the AUD as a “high-yield currency” has been significantly reduced.

3. Insufficient economic growth momentum
Australia’s domestic economic growth remains sluggish, reducing its ability to attract foreign investment. Additionally, US tariff policies impact global trade, further decreasing raw material exports.

When can the AUD escape its predicament? Three key factors determining medium- to long-term trends

The future trajectory of the AUD is not determined by a single factor but depends on the simultaneous shift of three critical variables:

Factor 1: Will the RBA shift to a hawkish stance?
Whether the Australian central bank maintains a hawkish stance will decide if the AUD can rebuild its interest rate advantage. If inflation remains sticky and the employment market stays resilient, expectations of RBA rate hikes will reignite buying interest in the AUD. Market forecasts suggest the RBA rate peak could reach 3.85%, providing clear support for the AUD.

Factor 2: Can China’s economy truly recover?
The rebound in China’s infrastructure and manufacturing activity directly determines the trajectory of iron ore prices. When commodity prices strengthen, the AUD typically reflects this quickly in the exchange rate. Conversely, if China’s recovery lacks momentum, even a short-term rebound may be followed by a decline in the AUD.

Factor 3: Will the dollar cycle reverse?
The US dollar is the decisive force in the global FX market. If the Federal Reserve enters a rate-cut cycle and the dollar weakens, risk currencies including the AUD will benefit. However, if risk aversion rises and capital flows back into the dollar, the AUD may face pressure even if its fundamentals are not deteriorating.

AUD outlook for 2025-2026: contrasting market forecasts

Market institutions have shown clear divergence in their outlooks for the AUD:

Optimistic view
Morgan Stanley predicts the AUD/USD could rise to 0.72, supported by the RBA’s hawkish stance and commodity prices. The Traders Union statistical model indicates an average of about 0.6875 by the end of 2026, rising further to 0.725 by the end of 2027, emphasizing Australia’s strong labor market and commodity demand recovery.

Conservative view
UBS believes that global trade uncertainties and changes in Fed policy could limit the AUD’s upside, with forecasts around 0.68 by year-end. Economists at the Commonwealth Bank of Australia warn that the AUD’s recovery may be short-lived, predicting the AUD/USD will peak around March 2026 but may fall again by the end of the year.

Neutral outlook
In the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by China’s data and US non-farm payroll figures. Australia’s fundamentals remain solid, and the relatively hawkish stance of the RBA provides support, but structural US dollar advantages persist, making a move to 1.0 unlikely. Short-term pressures stem from China’s economic data, while long-term positives include resource exports and commodity cycles.

Investment opportunities and risk warnings for the AUD

As one of the top five most traded forex pairs globally, the AUD/USD features high liquidity and regular volatility. Investors can participate in AUD movements through forex margin trading, employing long and short strategies with leverage.

However, a special warning: Forex trading is high-risk investment; investors may lose all capital. Any investment decision based on current forecasts should be made cautiously, considering personal risk tolerance.

Conclusion: The AUD is not a trending currency but a range-bound one

In summary, the AUD has short-term recovery potential but limited prospects for a sustained bullish trend. The hawkish stance of the RBA and strong commodity prices will provide support, but global economic uncertainties and potential dollar rebounds will cap gains.

As a commodity currency, the AUD’s movement fundamentally reflects global economic cycles and supply-demand dynamics of major commodities. Investors should focus on China’s economic data, RBA policy signals, and the dollar trend—rather than expecting the AUD to suddenly reverse its decade-long weakness. In the foreseeable future, the AUD is more likely to remain range-bound, with volatility offering trading opportunities.