The Outlook for the Australian Dollar in 2025

Key points:

• Forecasting currencies is very hard, except when currencies are at very extreme levels.
• The US dollar’s strength is a critical influence driving movements in the Australian dollar.
• The USD will be impacted by the following key drivers: Trump’s tariff policies, fewer predicted US interest rate reductions and continuing strength in the US technology sector.
• It is therefore suggested there is risk of the AUD heading below US$0.60 in the first half of 2025, even though the Australian dollar is already quite undervalued from a longer-term perspective.
• Businesses should prioritise risk management and stay informed about global economic trends to safeguard against potential currency fluctuations.

Forecasting currency movements: Why it’s never easy

Currency forecasting is notoriously difficult, especially when exchange rates are not at extreme highs or lows.

At the start of 2024, the Australian Financial Review’s (AFR) Quarterly Survey of Economists predicted the AUD would rise from US$0.67 to US$0.70 by year’s end. That was a relatively timid forecast given on average the AUD trades a three cent range every month and especially because the average annual range for the currency since the December 1983 float has been eleven cents. The AUD finished the year at US$0.62 with the lowest traded level recorded on the last day of the year and traded through a 7 cent range against the USD over 2024.

As we start 2025, the latest AFR survey of economists again expects the AUD to rise over 2025 to US$0.65 on 30 June and further to US$0.67 by year’s end. Notably, none of the 36 economists surveyed expect the AUD to fall below its current US$0.62 level by mid-year, and only two anticipate a further decline by year-end.

 

The Influence and Trends of the USD on the AUD

The chart shows a long-term history of the AUD, most importantly plotted against the DXY trade-weighted index for the USD. The USD DXY is plotted on an inverse scale, to align with the AUD/USD exchange rate as customarily quoted.

A few points worth noting are:

• The AUD tends to be weakest when the USD is strongest and strongest when the USD is weakest. The strength (or weakness) in the USD are often an overlooked factor in AUD research and forecasting in my experience.
• The AUD has ranged from a low of US$0.4850 at the peak of the US technology boom of the early 2000s, to a high just above US$1.10 at the peak of China’s emergence, the Australian mining boom, high commodity prices and the Global Financial Crisis deep US recession. Australian interest rates were considerably above US interest rates at these peaks also. At these extremes, there were commentators predicting the AUD would drop further to around US$0.35 and rise further beyond US$1.10 with the most extreme forecast I heard suggesting an AUD/USD exchange rate of US$1.80!
• Over time the AUD has averaged around US$0.75 – though the currency has spent relatively little time at its average level. It’s important to remember this average at times of currency extremes.
• Recently, the USD has risen 7.5% and the AUD fallen 10% since late 2024, with markets in recent times focusing particularly on the proposed tariff policies of incoming US President Donald Trump.

 

Considerations for Business

The following major drivers of the USD suggest there will be AUD declines in the nearer term:

• President Trump’s tariff plans which are expected to negatively impact the Chinese economy and boost the USD. Furthermore, the extent of tariffs implemented will be important in a possible further extension to the downside in the near term, as will the duration of tariff implementation for the period of the lower AUD.
• Fewer predicted US interest rate reductions than previously expected, which along with the RBA commencing an easing cycle in mid-February, will mean a narrower Australia/US interest rate differential.
• The US Technology Boom, which I believe has been a key driver of recent USD strength and AUD weakness. This was a key force in the much lower AUD of the early 2000s and deserves considerable further investigation.

 

These impacts suggest that an AUD/USD exchange rate below US$0.60 would not be a surprise in the first half of 2025.

Business owners should focus on managing risks rather than relying on currency forecasts:

• Forecasting in general is very hard, and even more so for currencies. It’s important to protect your business from potential adverse financial market and economic developments than bet that you know better than the markets.
• A lower AUD increases the attractiveness of hedging US-dollar assets, especially as it deviates further from its long-term average of US$0.75.
• Prioritise risk management and stay informed about global economic trends. Proactively addressing currency risks will help to potentially safeguard your business against large currency fluctuations.

 

Author: Ivan Colhoun  Consulting Economist for Bank of Sydney Bachelor of Economics (Hons) Ivan is a highly experienced chief economist and keynote speaker on the Australian economy and financial markets. His career has included leadership roles within financial and professional service organisations, as well as the Reserve Bank of Australia.