The truth behind the 35% depreciation of the Australian dollar over ten years: Is it the super-strong US dollar cycle or the decline of the Australian dollar itself?

As the fifth-largest trading currency globally, the AUD/USD exchange rate is also among the top five most traded currency pairs worldwide. Its high liquidity and low spreads make the Australian dollar a popular choice for short- to medium-term trading and medium- to long-term positioning. More importantly, the AUD has long been regarded as a high-yield currency, making it a classic target for carry trade strategies.

However, when looking at a longer time horizon, the performance of the AUD has been quite disappointing. Since the peak of 1.05 in early 2013, over the ten years from 2013 to 2023, the Australian dollar has depreciated by over 35% against the US dollar, while the US dollar index increased by 28.35% during the same period. The euro, yen, and Canadian dollar have also depreciated against the dollar. This indicates that the decline of the AUD is not an isolated phenomenon but a natural result of the global entering a “super cycle” of a strong US dollar.

An exception occurred during the COVID-19 pandemic in 2020. At that time, Australia’s pandemic control was relatively stable, demand for commodities like iron ore in Asian markets was strong, and the Reserve Bank of Australia (RBA) adopted policies that together drove the AUD/USD to rise sharply by about 38% within a year. However, this rebound was short-lived, and since then, the AUD has mostly been consolidating or weakening.

Entering 2025, iron ore and gold prices surged significantly, and the Federal Reserve’s rate cuts led to capital flows into risk assets, pushing the AUD higher. The AUD/USD briefly broke above 0.6636, with an appreciation of about 5–7% for the year. But from a longer-term perspective, the trend remains fragile, with limited rebound capacity.

Commodities Are No Longer Hot, and the Yield Advantage Has Disappeared—Why Has the AUD Struggled to Break Through?

The recent weakness of the AUD over the past decade fundamentally stems from the simultaneous decline of three factors: sliding commodity demand, the disappearance of yield advantage, and the structurally super-strong US dollar.

From a technical standpoint, every time the AUD approaches previous high levels, selling pressure becomes evident, indicating that market confidence in the Australian dollar remains limited. What is the root cause?

First, US tariff policies impact global trade. As a major commodity exporter, Australia’s exports of metals and energy products have declined, directly undermining the AUD’s commodity currency characteristics. Second, the interest rate differential between Australia and the US is difficult to reverse. Australia’s domestic economy has been mediocre, with insufficient growth momentum, leading to a decline in the relative attractiveness of Australian assets. Additionally, the US dollar remains super-strong due to the resilience of the US economy and the Fed’s sustained high interest rates, making it difficult for the AUD to resist.

From a macro perspective, the AUD now resembles a “rebound but lacking a clear trend” currency. The market tends to chase short-term commodity rebounds, but once the sentiment shifts, the AUD has little means of self-defense. This is because the AUD’s movements are often driven by external factors rather than stable domestic fundamentals.

To Understand the AUD Trend, Focus on These Three Indicators

The medium- to long-term bullish or bearish reversals of the AUD mainly depend on the interaction of three core variables:

1. Whether the RBA can rebuild the interest rate differential advantage

The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Market expectations suggest a possible rate hike again in 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 strong, the RBA maintaining a hawkish stance will help the AUD rebuild its interest differential appeal. But if rate hike expectations fall short, the AUD’s support will weaken significantly.

2. China’s economic trajectory and commodity prices

Australia’s exports are highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. China’s demand is the strongest external engine for the AUD.

When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen in tandem, quickly reflecting in the exchange rate. But if China’s economic recovery lacks momentum, even short-term commodity rebounds may cause the AUD to spike temporarily but then fall back, preventing a sustained upward trend.

3. US dollar trend and global risk sentiment

From a capital flow perspective, the Federal Reserve’s policy cycle remains the core driver of the global FX market. In a rate-cutting environment, a weaker dollar generally benefits risk assets like the AUD; however, if risk aversion increases and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are not deteriorating.

Recently, market sentiment has slightly improved, but with energy prices still unpromising and global demand remaining weak, investors tend to favor safe-haven assets like the dollar over the AUD, limiting its upside potential.

In summary, for the AUD to break out into a genuine medium- to long-term uptrend, three conditions must be met simultaneously: the RBA maintains a hawkish stance, China’s demand substantively improves, and the US dollar enters a structural weakening phase. If only one or two of these are present, the AUD is more likely to oscillate within a range rather than trend upward unilaterally.

2026 AUD Outlook: Can a Rebound Turn Into a Trend?

Most market analysts agree: the AUD has short-term recovery potential, but a strong upward trend requires clearer macroeconomic conditions.

Different institutions have divergent views on the future of the AUD:

Morgan Stanley remains optimistic, projecting the AUD/USD could rise to 0.72 by the end of 2025. This outlook is based on the RBA maintaining a hawkish stance and a strengthening of commodity prices providing support.

Traders Union’s statistical model suggests 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. These optimistic forecasts assume a soft landing of the US economy and a decline in the dollar index, which would favor commodity currencies like the AUD.

UBS takes a more conservative view, believing that despite Australia’s resilience, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with the exchange rate remaining around 0.68 by year-end.

CBA economists recently issued a cautious report, suggesting that the AUD’s recovery might be short-lived. They forecast the AUD/USD will peak around March 2026 but may fall back again by year-end. Some Wall Street analysts also warn that if the US avoids recession but the dollar remains super-strong due to interest rate differentials, the AUD will struggle to break through the 0.67 resistance level.

Personally, I expect the AUD to oscillate in the 0.68–0.70 range in the first half of 2026. Short-term pressures mainly stem from fluctuations in China’s economic data, while long-term positives include Australia’s resource exports and commodity cycles. The AUD is unlikely to plummet sharply because of Australia’s solid fundamentals and the relatively hawkish stance of the RBA; however, it probably won’t surge to 1.0 either, given the persistent structural strength of the dollar.

Risks and Opportunities in AUD Investment

As one of the top five most actively traded currency pairs globally, the AUD/USD exchange rate is influenced by multiple factors. While predicting currency movements is inherently challenging, the AUD’s distinct characteristics and high liquidity make analysis more accessible.

Investors can participate in AUD trading through forex markets, with some platforms offering two-way trading and leverage options. But note that forex trading involves high risk, and investors may lose all their capital. Before making any investment decisions, fully understand the risks and implement proper risk management.

Summary of the AUD Outlook

The AUD’s “commodity currency” attribute remains prominent, with strong correlations to copper, iron ore, coal, and other raw material prices.

Overall, short-term support is likely to come from the RBA’s hawkish stance and strong commodity prices. However, in the medium to long term, global economic uncertainties and potential rebounds in the dollar could limit the upside and lead to more volatile movements.

Although the AUD can experience rapid short-term fluctuations, its high liquidity, predictable volatility patterns, and clear economic structure make it relatively easier to analyze medium- to long-term trends. Investors participating in AUD trading should closely monitor RBA policy developments, China’s economic data, and the US dollar index, as changes in these three factors will directly influence the future direction of the AUD.