## Why Is the Australian Dollar Continually Weakening? Analyzing the Causes of AUD Decline and Future Rebound Potential

The Australian dollar is the fifth most traded currency globally, and the AUD/USD currency pair ranks among the top five most active trading pairs. As a high-yield currency, the AUD was once favored for hot money flows and carry trades. However, over the past decade, the AUD's performance has been disappointing—dropping from 1.05 in early 2013 to today. **The reasons for the AUD's decline are complex and multifaceted, far beyond just interest rate differentials.**

### Why Has the AUD Declined Over 35% in Ten Years? A Deep Dive into the Causes of AUD Weakness

From 2013 to 2023, the AUD has depreciated over 35% against the USD, while the US dollar index has risen by 28.35%. This is not an isolated phenomenon for the AUD; the euro, yen, and Canadian dollar have faced similar challenges, reflecting a global "strong dollar cycle" suppression.

**The reasons for the AUD's decline can be summarized into three core factors:**

**First, the decline of commodity cycles and weak Chinese demand.** Australia’s economy is highly dependent on raw material exports, with iron ore, coal, and energy comprising major export sectors. As China shifts from rapid expansion to sluggish recovery, demand for these commodities has significantly decreased, weakening the appeal of the AUD as a "commodity currency." Even if commodity prices rebound in the short term, without Chinese demand support, the AUD is prone to "rally and retreat" movements.

**Second, the disappearance of interest rate advantage.** The AUD was once attractive due to higher interest rates compared to the US. But as the US continues to hike rates, the Reserve Bank of Australia (RBA)’s relatively cautious policy has narrowed the interest rate differential. By late 2024, the RBA’s cash rate is around 3.60%. Although further rate hikes are expected, if these do not materialize as anticipated, the AUD’s support will weaken significantly.

**Third, the deterioration of the global trade environment and the long-term advantage of the US dollar.** US tariffs impact global trade flows, putting pressure on raw material exports and further diminishing the AUD’s status as a commodity currency. Meanwhile, the resilience of the US economy and its high interest rate environment give the dollar a structural advantage, with capital continuing to flow into USD assets, making it difficult for the AUD to break through.

### Will the rebound in 2025 be sustained? The key depends on these three factors

Although the AUD/USD rose to 0.6636 in the first half of 2025, an increase of about 5-7%, this is merely a corrective rebound in a longer cycle. **The true turning point of the AUD exchange rate depends on the following three variables:**

**1. RBA monetary policy: Will the interest rate differential be revived?**

Whether the RBA maintains a hawkish stance is crucial. If inflation remains sticky and the employment market stays resilient, the RBA may implement rate hikes in 2026, with the peak rate possibly reaching 3.85%. This would rebuild the interest rate advantage over the USD. Conversely, if rate hike expectations fall short, the AUD will lose an important support.

**2. China’s economy and commodity prices trend**

Australia’s export structure determines its "commodity attribute." When China’s infrastructure and manufacturing sectors bottom out and rebound, and commodity prices continue to strengthen, it will directly influence the medium-term direction of the AUD. Recent rises in iron ore and gold prices are positive signals, but if China’s recovery lacks momentum, this rebound may be short-lived.

**3. US dollar cycle and global risk sentiment**

The Federal Reserve’s pace of rate cuts still dominates the global forex market. An environment of falling rates generally benefits risk currencies like the AUD, but if risk aversion increases and capital flows back into the dollar, the AUD could weaken even if its fundamentals are stable. Currently, energy prices and global demand remain cautious, leading investors to avoid risk-on currencies.

### Divergence in Major Institutions’ Outlooks for the AUD

Regarding the AUD’s trajectory beyond 2026, market opinions vary significantly.

**Morgan Stanley’s optimistic view:** expects the AUD/USD to reach 0.72 by the end of 2025, supported by the RBA’s hawkish stance and commodity prices.

**Traders Union model forecast:** averages around 0.6875 by the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by the end of 2027, assuming strong Australian labor markets and a commodity demand recovery.

**UBS’s conservative outlook:** considering global trade uncertainties and Fed policy shifts, expects the AUD to stay around 0.68 by year-end, with limited upside.

**CBA’s cautious stance:** believes the AUD’s rebound may be short-lived, predicting a peak around March 2026, followed by a potential decline later in the year.

**Other Wall Street analyses warn:** if the US avoids recession but the dollar remains strong, the AUD will struggle to break through 0.67 resistance.

Overall, the AUD is likely to fluctuate between 0.68 and 0.70 in the first half of 2026. Key catalysts will be China’s economic data and the US non-farm payroll report. Fundamentally, Australia’s resilient economy and relatively hawkish RBA provide support, but structural US dollar strength remains, making a significant rebound difficult. The long-term bullish outlook is driven by resource exports and the commodity cycle recovery.

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) Summary of AUD Trends

The AUD is fundamentally a commodity currency, closely linked to iron ore, copper, and coal prices. In the short term, the hawkish stance of the RBA and strong raw material prices provide support; in the medium to long term, global economic uncertainties and potential USD rebound pose risks to the AUD.

While precise forecasting is challenging, the AUD’s structural characteristics make medium- to long-term trend analysis more straightforward. Investors should continuously monitor RBA policies, China’s economic developments, and the US dollar cycle to seize trading opportunities.