Why has the Australian dollar fallen to a historic low? Three major factors determine whether it can reverse

The AUD/USD, as the fifth-largest trading currency pair globally, was once a favored high-yield currency and trading instrument among investors. However, over the past decade, its trend has been consistently weakening—from an early 2013 level of 1.05 down to the current 0.66, a decline of over 35%. Even more disheartening is that rebounds often “spike high and fall back,” making sustained strength difficult. So, why is the Australian dollar always lackluster? Can it regain its momentum in the future?

The Three Main Culprits Behind the AUD’s Historical Lows

To understand the AUD’s decline, we must identify three deep-rooted reasons:

First is the suppression by the supercycle of the US dollar. Over the past ten years, not only has the AUD depreciated, but the euro, yen, and Canadian dollar have also collectively weakened, indicating a “global strong dollar era.” During this period, the US dollar index (DXY) increased by 28.35%, leaving the AUD unable to resist.

Second is the weakness in commodity prices. Australia’s exports heavily depend on raw materials like iron ore, coal, and energy. When China’s economy slows and manufacturing demand declines, commodity prices fall accordingly. As a “commodity currency,” the AUD naturally weakens. This pressure has been especially evident from 2023 to 2024.

Finally, the diminishing interest rate advantage. The Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) are seeing their interest rate differentials narrow. With sluggish domestic economic growth and relatively mild inflation pressures, the allure of high-yield currencies for arbitrage traders diminishes, leading to a shift in capital flows.

Can the RBA’s Hawkish Stance Turn the Tide?

This is the first critical turning point for the AUD’s future.

Currently, the RBA’s cash rate is about 3.60%. Market expectations suggest a possible rate hike again by 2026, with the Commonwealth Bank of Australia (CBA) even predicting a peak of around 3.85%. If inflation remains sticky and the employment market stays resilient, maintaining a hawkish stance could help the AUD rebuild its interest rate differential appeal.

However, there are also risks—if rate hike expectations fall short, the AUD will lose its last line of defense. This expectation gap could cause rapid adjustments in the short term.

China’s Economic Recovery as an External Driver for the AUD’s Rebound

Australia’s relationship with China is extremely close—its export structure is dominated by iron ore, coal, and liquefied natural gas, with China being the largest buyer.

When China ramps up infrastructure investment and manufacturing activity rebounds, iron ore prices tend to rise quickly, and the AUD exchange rate responds accordingly. The pandemic period in 2020 is a typical example—strong demand from Asia for commodities pushed the AUD/USD up by about 38% within a year.

But if China’s economic recovery lacks momentum, even a short-term commodity rebound may be followed by a “quick spike and fall” pattern. This also explains why the AUD has rebounded several times in recent years but has struggled to establish a stable upward trend.

The US Dollar’s Shift as the Determining Factor for the AUD’s Ceiling

The Federal Reserve’s policy cycle remains the core driver of the global forex market. In a declining interest rate environment in the US, the dollar tends to weaken, benefiting risk-on currencies like the AUD. But if risk aversion rises and capital flows back into the dollar, the AUD, even if its fundamentals are unchanged, will be pressured.

In the second half of 2025, the AUD once rose to 0.6636, gaining about 5-7% throughout the year, mainly benefiting from the US rate-cut cycle and rising commodity prices. However, with weak global demand and uncertain energy price outlooks, investors still prefer safe-haven assets over cyclical currencies, limiting the AUD’s upside potential.

When Can the AUD Truly Strengthen? Three Conditions Must Be Met

Market forecasts for the AUD’s future diverge, reflecting the complexity of the situation:

Optimists (e.g., Morgan Stanley) expect the AUD/USD to rise to 0.72, with Traders Union’s statistical models predicting about 0.6875 by the end of 2026 and reaching 0.725 by the end of 2027. These forecasts assume a soft landing of the US economy, a decline in the dollar index, and a recovery in commodity demand.

Conservatives (e.g., UBS) believe that global trade uncertainties and potential changes in Fed policy will limit the AUD’s gains, projecting a level around 0.68 by year-end. CBA economists are more pessimistic, suggesting the AUD’s rebound may be short-lived, with a peak around March 2026 before declining again.

To see a genuine medium- to long-term bullish trend in the AUD, all three conditions must be satisfied simultaneously:

1. RBA shifts back to a hawkish stance—interest rate differentials must be restored.
2. Substantial improvement in China’s demand—commodity prices must stabilize and rise.
3. A structural weakening of the US dollar—global capital flows must shift toward risk assets.

If only one or two of these conditions are met, the AUD is more likely to remain in a range (e.g., 0.68–0.70) rather than trend upward unilaterally.

Practical Trading Tips for the AUD

The AUD/USD pair, characterized by high liquidity and strong volatility patterns, along with Australia’s distinct economic structure, makes medium- to long-term trend analysis relatively straightforward—much easier than analyzing more complex assets.

Investors can participate in AUD fluctuations through forex margin trading. This trading method supports both long and short positions, with leverage ranging from 1-200 times. It’s suitable for both bullish and bearish strategies, with low entry barriers and appropriate for small to medium capital. However, it’s important to remember that forex trading is high-risk, requiring strict risk management.

Final Judgment on the AUD’s Outlook

As a commodity currency, the AUD’s fate is closely linked to global commodity cycles, China’s economic trajectory, and Fed policy directions. In the short term, the hawkish stance of the RBA and strong raw material prices may provide support; in the medium to long term, vigilance is needed regarding global economic uncertainties and the risk of a US dollar rebound.

Currently, the AUD is at a historically low level, facing structural challenges but also containing opportunities for recovery. Both traders and asset allocators should closely monitor China’s data, RBA decisions, and the dollar’s movements—these are the three key indicators to assess whether the AUD truly has the conditions for a reversal. Expecting a “skyrocket” is unrealistic; however, range trading or medium-term positioning holds significant potential.