## The Ten-Year Dilemma of the Australian Dollar: Why Rate Hikes Struggle to Resolve the Weakness?

As the fifth-largest trading currency globally (after the US dollar, euro, yen, and British pound), the AUD/USD currency pair is among the most actively traded in international markets. Its liquidity, low spreads, and popularity for short-term trading and medium- to long-term allocations make it a hot asset.

Traditionally, the Australian dollar has been classified as a high-yield currency due to relatively high interest rates, commonly used in carry trades and hot money flows. However, over the longer term, the overall performance of the AUD has been rather lackluster, with rebounds occurring only during specific cycles, while most of the time it remains in consolidation or depreciation phases.

## The 2020 Pandemic Miracle and Its Aftermath

During the COVID-19 outbreak in 2020, Australia’s relatively successful containment measures, sustained demand for raw materials like iron ore in Asia, and the Reserve Bank of Australia’s policy responses jointly drove the AUD to appreciate about 38% against the US dollar within a year. This rally became a rare bright spot in recent years.

However, the good times did not last. Since then, the AUD has mostly traded sideways or under pressure. Entering the second half of 2025, despite sharp rises in iron ore and gold prices, and the Federal Reserve’s rate cuts boosting risk assets, the AUD/USD briefly reached 0.6636, with a year-to-date appreciation of about 5-7%. Yet, from a longer-term perspective, the weak structural trend of the Australian dollar remains difficult to reverse.

## Commodity Cycle Failures and the Unresolved Strong Dollar Dilemma

Looking at the ten-year trend since early 2013, the AUD has depreciated over 35% (from 1.05 to today’s levels), while the US dollar index (DXY) has risen 28.35%. In comparison, major currencies like the euro, yen, and Canadian dollar have also weakened against the dollar, reflecting a broad strong dollar cycle. Whether through technical patterns or fundamental signals, the AUD remains at a disadvantage, explaining why rebounds are often unable to stabilize at high levels.

Whenever the AUD approaches previous highs, selling pressure emerges, indicating limited investor confidence. Analysis points to three main sources of pressure:

**First, the impact of US tariff policies on global trade**—raw material exports (metals, energy) face headwinds, weakening the AUD’s status as a commodity currency.

**Second, the difficulty in reversing interest rate differentials**—the yield gap between Australia and the US cannot be fundamentally improved, reducing the attractiveness of carry trades involving the AUD.

**Third, insufficient domestic economic resilience**—Australia’s sluggish economic growth and declining relative asset attractiveness.

As a result, the AUD exhibits a “rebound without a clear trend” characteristic, driven more by external factors than internal fundamentals.

## The Three Pillars Determining the Long-Term Trend of the AUD

To assess whether the AUD can sustain a rally, focus must be placed on these three core factors:

**First, the Reserve Bank of Australia’s (RBA) interest rate policy**

The AUD has long been viewed as a high-yield currency, with its attractiveness heavily dependent on the interest rate differential. Currently, the RBA’s cash rate is about 3.60%, with market expectations of further hikes in 2026, and the Commonwealth Bank forecasts a peak around 3.85%. If inflation remains sticky and the labor market stays resilient, a hawkish stance from the RBA could help rebuild the AUD’s interest rate advantage; otherwise, the rate hike expectations will weaken, reducing support.

**Second, China’s economic trajectory and commodity prices**

Australia’s export structure is highly reliant on iron ore, coal, and energy, making the AUD essentially a commodity currency. China’s demand is the key variable. When China’s infrastructure and manufacturing sectors rebound, iron ore prices tend to strengthen, and the AUD responds quickly; conversely, if China’s recovery falters, even short-term commodity rallies may be followed by a “high-level pullback” in the AUD.

**Third, the US dollar trend and global risk sentiment**

The Federal Reserve’s policy cycle continues to steer the global FX market. In a rate-cut environment, a weaker dollar generally benefits risk currencies like the AUD; however, if risk aversion rises and capital flows back into the dollar, the AUD can weaken even without deteriorating fundamentals. Recent market sentiment has improved somewhat, but energy prices and global demand remain cautious, with investors favoring safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

**For the AUD to break into a genuine medium- to long-term bull trend, all 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 in a range-bound oscillation rather than a sustained rally.

## Outlook for the AUD in 2026 and Beyond

The key to the AUD’s future trajectory lies in whether the “rebound can turn into a trend.” The consensus is that while the AUD may have short-term recovery potential, returning to a strong bull phase requires clearer macroeconomic conditions.

Different institutions have divergent forecasts. Morgan Stanley expects the AUD/USD to reach 0.72 by the end of 2026, supported by the possibility of the RBA maintaining a hawkish stance and rising commodity prices. The Traders Union’s models project an average of about 0.6875 (range 0.6738–0.7012) by the end of 2026, rising further to 0.725 by the end of 2027, emphasizing the recovery of Australia’s labor market and commodity demand.

UBS holds a more conservative view, noting that despite Australia’s economic resilience, global trade uncertainties and potential shifts in Fed policy could limit the AUD’s gains, with forecasts around 0.68 at year-end.

The Reserve Bank of Australia’s economists recently expressed a cautious outlook, suggesting the AUD’s recovery might be temporary, with a peak expected around March 2026, followed by a possible decline by year-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 resistance.

From personal observation, in the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70, influenced by Chinese data and US non-farm payrolls. The AUD is unlikely to crash sharply due to Australia’s solid fundamentals and the RBA’s relatively hawkish stance, but it also probably won’t reach parity (due to structural dollar strength). Short-term pressures mainly stem from Chinese data, while long-term positives include a resource export recovery and the commodity cycle revival.

## Summary of the AUD Outlook

As a “commodity currency” of a major resource-exporting country, the AUD’s characteristic remains strongly linked to prices of copper, iron ore, coal, and other raw materials.

In the short term, the hawkish stance of the RBA and strong commodity prices will provide support, but medium- to long-term risks include global economic uncertainties and potential rebounds in the dollar, which could limit upside and lead to sideways movement.

Although FX markets are volatile and precise forecasts are challenging, the AUD’s high liquidity, predictable volatility patterns, and its economic structure make medium- to long-term trend assessments relatively feasible. Investors interested in participating should closely monitor RBA decisions, Chinese economic data, and Fed policy developments, as the interaction of these factors will ultimately determine the AUD’s performance in 2026.