Why has the Australian dollar been weak for ten years? Three major factors determine whether a future reversal can become a reality

AUD/USD is one of the top five most traded currency pairs globally, characterized by high liquidity and low spreads, attracting countless short-term traders and medium- to long-term investors. However, when looking at a longer time horizon, the overall performance of the Australian dollar over the past decade has been disappointing—falling from 1.05 in early 2013 to depreciate over 35% by the end of 2023, while the US dollar index has risen by 28.35% during the same period. What economic secrets are hidden behind this divergence?

Why Is the Australian Dollar Becoming Weaker: The Main Victim of the Strong Dollar Cycle

The AUD has long been regarded as a high-yield currency, yet over the past ten years, it has struggled with depreciation. The fundamental reason is not a single factor but a comprehensive strong dollar cycle exerting downward pressure.

From a fundamental perspective, Australia’s economy is highly dependent on commodity exports—iron ore, coal, energy—defining its “commodity currency” nature. When China’s economy is robust, the AUD benefits significantly; when global demand weakens, the AUD bears the brunt.

From a interest rate differential standpoint, the gap between the Reserve Bank of Australia (RBA) and the Federal Reserve has continued to narrow. The RBA’s previously hawkish stance supported the AUD’s upward movement, but as global central bank policies shift, this advantage is eroding.

Additionally, US trade policies have impacted global raw material markets. Under tariff pressures, global commodity demand has softened, putting downward pressure on Australia’s main export prices, further dragging down the AUD. During 2023-2024, the AUD has been oscillating at high levels but struggling to gain momentum.

Rebound Does Not Equal a Trend Reversal: Why the AUD Cannot Sustain a Continuous Rise

In 2025, the AUD/USD appreciated by about 5-7%, reaching a level of 0.6636, seemingly signaling a turning point. However, this appears more like a “quick spike and retreat” pattern rather than a confirmed trend.

Whenever the AUD approaches previous highs, selling pressure emerges. This reflects market confidence in the AUD remains fragile. Key obstacles include:

First, structural challenges in commodity demand. China’s economic recovery lacks momentum, limiting its impact on iron ore and other raw materials. Even if commodity prices rebound short-term, without real demand support, the AUD will find it difficult to sustain gains.

Second, the difficulty in reversing the US-Australia interest rate differential. While the Fed’s rate cut cycle benefits the AUD, the structural interest rate gap between the US and Australia remains unfavorable for the AUD’s long-term attractiveness.

Third, domestic economic growth constraints in Australia. From an asset allocation perspective, Australia’s investment appeal is relatively low, making it hard to sustain capital inflows supporting the AUD.

Three Key Indicators to Watch for AUD’s Direction

To grasp the medium- to long-term bullish or bearish shifts in the AUD, investors should focus on three dimensions:

1. RBA monetary policy and interest rate differential recovery

The RBA’s cash rate is around 3.60%. Markets expect another rate hike possibly by 2026, with the Commonwealth Bank forecasting a peak of around 3.85%. If inflation remains sticky and employment stays resilient, the RBA’s hawkish stance could help rebuild the AUD’s interest rate advantage; otherwise, if rate hikes fall short, the AUD’s support will weaken significantly.

2. China’s economic cycle and commodity demand resonance

Australia’s export structure is heavily concentrated in minerals and energy, making the AUD essentially a commodity currency. China’s demand is a core variable. When infrastructure and manufacturing activity pick up, iron ore prices tend to strengthen, and the AUD reacts quickly; if China’s recovery falters, even short-term commodity rebounds may lead to a “spike and retrace” cycle for the AUD.

3. US dollar cycle and global risk sentiment

The Federal Reserve’s policy remains a key driver in global FX markets. In a rate-cut environment, a weaker dollar generally benefits risk currencies like the AUD; but if risk aversion rises and capital flows back into the dollar, the AUD can weaken even if fundamentals are stable. Recent volatility in energy prices and sluggish global demand suggest risk-off sentiment persists, leading investors to favor safe-haven assets over cyclical currencies.

2026 and Beyond: Divergent Views on the AUD’s Future

Major market institutions hold differing outlooks for the AUD.

Morgan Stanley is relatively optimistic, projecting the AUD/USD could rise to 0.72 by the end of 2025, assuming the RBA maintains a hawkish stance and commodity prices stay strong.

Traders Union’s model estimates an average of about 0.6875 by the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by 2027, citing strong Australian labor markets and commodity demand recovery.

UBS adopts a more conservative view, suggesting that global trade uncertainties and Fed policy shifts could limit upside potential, with the exchange rate around 0.68 by year-end.

CBA economists offer a cautious outlook, expecting a brief recovery with a peak around March 2026, but a possible decline again by year-end.

Some Wall Street analysts warn that if the US avoids recession but the dollar remains super-strong (supported by interest rate differentials), the AUD will struggle to break through the 0.67 resistance level.

Market Sentiment: The AUD’s Path Remains Uncertain

Overall, in the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by Chinese economic data and US non-farm payroll reports. The AUD is unlikely to collapse sharply due to Australia’s relatively solid fundamentals and the RBA’s hawkish stance; however, it also faces difficulty moving higher because of persistent structural dollar advantages.

Short-term pressures mainly stem from China’s data performance, while long-term bullishness depends on a potential revival in Australia’s resource exports and commodity cycles. For the AUD to break into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA reaffirms a hawkish stance, China’s demand substantively improves, and the US dollar enters a structural weakening phase. If only one of these conditions is fulfilled, the AUD is more likely to remain in a range rather than trend upward unilaterally.

Investment Insights for the AUD

As a liquidity-rich, volatile currency pair, AUD/USD’s short-term fluctuations are difficult to predict precisely. However, its economic structure makes medium- to long-term trend analysis more feasible. Investors should not be overly optimistic based on short-term rebounds but instead focus on monitoring the interactions among RBA policy moves, Chinese economic data, and global risk sentiment to better grasp the true direction of the AUD.

As a commodity currency, the long-term performance of the AUD still hinges on the strength of global economic recovery, whether commodity demand can truly rebound, and whether the US dollar cycle enters a substantive weakening phase. Until these key conditions are firmly established, the AUD’s upward momentum will remain limited.