Why has the Australian dollar fallen into a long-term depreciation dilemma? An in-depth analysis of the reasons for the AUD's depreciation and future turning points

As the fifth-largest global trading currency, the Australian dollar (AUD) boasts ample liquidity and low spreads, making it an ideal investment target. However, the reality has been quite the opposite—in the past decade, the AUD has depreciated by over 35% against the USD, becoming one of the weakest performers among major developed country currencies.

Understanding the reasons behind the AUD’s depreciation is key to predicting its future trend. This involves not only Australia’s economic fundamentals but also the deep structural changes in the global economic landscape.

Core Reasons for AUD Depreciation: Systemic Pressure in a Strong USD Cycle

The long-term decline of the AUD is not accidental but the result of multiple overlapping factors.

First Layer: The US Supercycle

From early 2013 at 1.05 to the end of 2023, the AUD/USD fell by over 35%, while the US Dollar Index (DXY) rose by 28.35% during the same period. This is not unique to the AUD—EUR, JPY, CAD, and others have also depreciated relative to the USD. It reflects a global phenomenon: the US has entered a decade-long period of dollar strength.

The USD’s super-strong performance is driven by the US economy’s relative advantage, aggressive rate hikes by the Federal Reserve, and attractive US Treasury yields. In this environment, the simple and direct reason for the AUD’s depreciation is that it is not the USD.

Second Layer: Loss of Interest Rate Differential Advantage

The AUD was once called a “high-yield currency” and favored by carry traders. But as the Reserve Bank of Australia (RBA) and the Federal Reserve diverge in their policies, this advantage has gradually diminished.

Between 2009 and 2011, Australia’s interest rates were significantly higher than those in the US, coupled with China’s robust recovery boosting commodity demand, pushing the AUD close to 1.05. But by 2023-2024, the interest rate gap has narrowed, and the AUD lacks compelling reasons to attract capital inflows, making its prolonged weakness unsurprising.

Currently, the RBA’s cash rate is about 3.60%, with market expectations of a possible hike to 3.85% by 2026. Yet, the core issue remains—the US interest rates are still high, making it difficult to rebuild the interest rate differential advantage.

Commodity Currencies’ Fate: External Variables Behind AUD Depreciation

Australia is a typical commodity-exporting country. Iron ore, coal, natural gas, and other raw materials constitute the bulk of exports, and the AUD’s movements are highly correlated with commodity cycles.

Key Driver of AUD Depreciation: Weak Chinese Demand

During the 2020 pandemic, Australia’s COVID control was relatively stable, and strong demand from Asia (especially China) for iron ore and coal temporarily boosted the AUD by about 38% within a year. This was one of the most remarkable periods for the AUD in recent years.

However, the story quickly turned. China’s economic recovery lacked momentum, the property sector remained troubled, infrastructure investment peaked, and iron ore demand rapidly declined from its peak. The reason for the AUD’s depreciation became clear—without China’s support, the currency lost its key upward momentum.

Even if iron ore prices rebound in the short term, weak underlying Chinese demand often leads to “spikes followed by declines” in the AUD. The rebound in the second half of 2025 exemplifies this logic: commodities temporarily strengthen, pushing the AUD up to 0.6636, but without sustained fundamentals, the rally is limited.

Policy-Level Causes of AUD Depreciation: Trade Wars and Structural Challenges

Frequent changes in US tariffs have added new pressure on the AUD.

Commodity-exporting countries are often the first to be affected during escalations in global trade frictions. Tariff policies that reduce global demand directly impact Australian exports. Metal and energy prices come under pressure, and the AUD loses its commodity currency support—this is an additional variable behind recent depreciation.

Meanwhile, Australia’s domestic economic momentum is weak. High inflation and high interest rates have led to heavy household debt, sluggish consumption growth, and declining asset attractiveness. These factors further diminish foreign investment interest in Australian assets.

Market Divergence on the AUD’s Future Outlook

Major institutions have differing views on the medium-term trend of the AUD, reflecting varied judgments on whether the depreciation drivers can be alleviated.

Optimistic Viewpoints

Morgan Stanley expects the AUD/USD to rise to around 0.72 by the end of the year, supported by the RBA’s hawkish stance and strengthening commodity prices. The 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.

The common logic behind these forecasts is: if the US economy soft-lands and the dollar index declines, the AUD, as a risk asset, will benefit.

Cautious Viewpoints

UBS’s more conservative forecast suggests that ongoing global trade uncertainties and Fed policy shifts will limit the AUD’s upside, expecting the exchange rate to stay around 0.68 by year-end. CBA Economists warn that the AUD’s recovery may be short-lived, predicting a peak around March 2026, followed by a possible decline by the end of the year.

Can the Reasons for AUD Depreciation Be Reversed? Three Necessary Conditions

For the AUD to enter a genuine medium- to long-term bullish phase, three conditions must be met simultaneously:

Condition 1: RBA Reverts to a Hawkish Stance

The RBA needs to maintain or further raise interest rates amid sticky inflation and a resilient labor market, thereby restoring or widening the interest rate differential with the US. This is crucial for reversing the depreciation trend.

Condition 2: Substantial Improvement in Chinese Demand

Clear improvements in infrastructure policies, manufacturing activity, and real estate policies are needed to boost demand for iron ore, coal, and other commodities, benefiting Australia’s exports and supporting the AUD. Short-term commodity rebounds are not enough.

Condition 3: Structural Weakening of the US Dollar

A true easing cycle by the Fed, leading to a sustained decline in the dollar index, along with improved risk asset flows, would create the most favorable external environment for the AUD.

If only one of these conditions is met, the AUD is more likely to remain range-bound rather than trend upward unilaterally.

Short-Term Outlook and Long-Term Perspective

In the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70, influenced by Chinese economic data and US non-farm payrolls. The reasons for depreciation will be difficult to eliminate entirely in the short term, but Australia’s solid fundamentals and the relatively hawkish stance of the RBA suggest the currency won’t collapse sharply.

Long-term, the structural advantage of the US dollar remains, and the AUD is unlikely to surge past 1.0 in the near future. However, Australia’s role as a resource-exporter and beneficiary of commodity cycles remains unchanged, and medium-term bullish factors continue to warrant attention.

The complexity of the AUD’s depreciation stems from multiple forces—macro cycles, policy choices, external demand—that interact. Understanding how these forces interplay is more meaningful than simply predicting exchange rates. For traders, the AUD’s liquidity and volatility patterns offer opportunities to capitalize on these dynamics.