The Australian dollar's decade-long decline is hard to reverse. Will it truly turn around in 2026? Future outlook analysis of the Australian dollar trend

The Australian dollar is the fifth-largest reserve currency by global trading volume and one of the most liquid currency pairs in the international foreign exchange market. However, from a long-term perspective, the performance of the Australian dollar over the past decade has been quite weak, underpinned by deep economic logic.

Why Is the Australian Dollar Becoming Weaker? The Fundamental Reasons for Over 35% Depreciation in Ten Years

Since early 2013 at the level of 1.05, by 2023, the AUD/USD has depreciated by over 35%, while the US dollar index has risen by 28.35% in the same period. This indicates that the Australian dollar is not weakening in isolation but is caught in a comprehensive strong dollar cycle.

Looking at the performance of the Australian dollar over the past decade, several key periods show markedly different characteristics:

2009–2011: China’s robust recovery, strong demand for commodities, and significantly higher Australian interest rates compared to the US led the AUD to reach near 1.05 at its peak.

2020–2022: During the pandemic, Australia’s relatively stable containment policies, strong demand for iron ore in Asia, and coordinated central bank policies drove the AUD to rise about 38% within a year, even briefly breaking below 0.80.

2023–2024: China’s economic recovery has been sluggish, commodity prices have fluctuated at high levels, and the interest rate differential between Australia and the US has narrowed, leading the AUD into a prolonged weak phase.

Since 2025: Iron ore and gold prices rebounded, and the Fed’s rate cuts prompted capital flows into risk assets, pushing the AUD briefly to 0.6636. Overall, in 2025, the AUD appreciated by about 5–7%, but in the long run, the weak trend remains unchanged.

Whenever the AUD approaches previous highs, market selling pressure increases significantly, reflecting investors’ limited confidence in the currency.

Three Key Drivers of the Future AUD Trend

To determine whether the AUD can reverse its downward trend, investors need to focus on the following three core variables:

1. RBA Interest Rate Policy and Spread Rebuilding

The AUD has long been regarded as a high-yield currency, with its attractiveness heavily dependent on the interest rate differential structure. Currently, the Reserve Bank of Australia (RBA) cash rate is about 3.60%, and market expectations suggest a possible rate hike again in 2026, with some institutions believing the peak could reach 3.85%.

If inflation remains sticky and the employment market stays resilient, the RBA’s hawkish stance will help the AUD rebuild its interest rate advantage; conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly.

2. China’s Economy and Commodity Prices

Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency, with Chinese demand being the most critical variable.

When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen in tandem, and the AUD usually reflects this quickly in the exchange rate. However, if China’s recovery is insufficient, even a short-term rebound in commodities may lead to a “spike and fall” pattern in the AUD. This also explains why the AUD often lags behind commodity prices.

3. US Dollar Trends and Global Risk Sentiment

The Fed’s policy cycle remains central to the global FX market. In a rate-cut environment, a weaker dollar generally benefits risk currencies, and the AUD benefits accordingly. But if risk aversion rises and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are stable.

Recent energy prices and global demand remain cautious, with investors preferring safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

Forecast of the AUD’s Future Trend: Institutional Views

Market opinions on the AUD outlook vary, reflecting the complexity of judgments:

Morgan Stanley expects the AUD to possibly rise to 0.72 by the end of 2025, mainly supported by the RBA’s potential hawkish stance and strengthening commodity prices.

Traders Union’s statistical model projects an average of about 0.6875 by the end of 2026 (range 0.6738–0.7012), rising further to 0.725 by the end of 2027, emphasizing strong Australian labor markets and a recovery in commodity demand.

UBS holds a more conservative view, believing that despite resilience in Australia’s economy, global trade uncertainties and potential changes in Fed policy could limit the AUD’s gains, with an expected exchange rate around 0.68 by year-end.

Economists at the Commonwealth Bank of Australia recently expressed a more cautious outlook, suggesting the AUD’s recovery may be short-lived, predicting it will peak around March 2026 but could fall again by the end of 2026.

Some Wall Street analysts 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 0.67 resistance.

Personal Perspective: Pragmatic Judgment on the Future of the AUD

Based on various viewpoints, the AUD is likely to fluctuate between 0.68 and 0.70 in the first half of 2026, mainly influenced by Chinese data and US non-farm payrolls.

The AUD is unlikely to collapse sharply because Australia’s fundamentals are relatively stable, and the RBA remains relatively hawkish; but it also won’t surge to 1.0 because structural dollar advantages still exist.

Short-term pressures mainly stem from China’s economic data, while long-term positives include resource exports and commodity cycles. For the AUD to break out into a genuine medium- to long-term bull market, 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. Having only one or two of these conditions is more likely to result in the AUD maintaining a range-bound pattern rather than a one-way rally.

Summary

The AUD’s characteristic as a “commodity currency” of a resource-exporting country remains prominent, especially with its close linkage to prices of copper, iron ore, coal, and other raw materials. In the short term, the RBA’s hawkish stance and strong commodity prices will provide support; but in the medium to long term, global economic uncertainties and potential dollar rebounds will limit the upside.

While the future trajectory of the AUD is difficult to predict precisely, its high liquidity, strong volatility patterns, and clear economic structure make medium- to long-term trend assessments more manageable. By understanding the key variables—RBA policy, Chinese economic conditions, and US dollar movements—one can gain a clearer picture of the AUD’s future performance.