Australian dollar can't recover: a decade of depreciation hard to reverse, structural dilemma deepening

The Australian dollar was once synonymous with high-yield currencies, attracting global hot money and carry traders. However, over the long term, this once-glamorous commodity currency has struggled to return to its historical highs. Starting from a peak of 1.05 in early 2013, the AUD/USD has depreciated over 35% in the following decade, while the US dollar index rose by 28.35%. This is not just an isolated phenomenon for the AUD but a reflection of a global strong dollar cycle that has overwhelmed all competitors.

The decline of the AUD is not a temporary correction but a sign of deep structural changes. Even when the AUD appreciated 5-7% in 2025 and briefly approached 0.6636, this rebound was not enough to alter the long-term weakness. Every time the AUD nears previous highs, selling pressure emerges, indicating a lack of sustained investor confidence.

Over 35% depreciation in a decade: Why even rebounds struggle to hold high levels

The AUD’s weakness is driven by multiple factors, not just one. First, the interest rate differential between Australia and the US no longer attracts investors. When Australian rates were significantly higher than US rates, the interest advantage drew carry traders. Now, that appeal has diminished considerably, and the interest rate gap faces long-term convergence pressures.

Second, the commodity price support has weakened. As a major exporter of iron ore, coal, and energy, Australia’s economy is highly linked to commodity prices. However, slowing Chinese economic growth and declining demand for raw materials have impacted Australia’s export outlook. Although iron ore and gold prices briefly rose in late 2025, these rebounds are insufficient to offset medium- and long-term demand softness.

Most fundamentally, the structural advantage of the US dollar remains intact. With US interest rates higher than Australia’s, a relatively resilient US economy, and risk assets under pressure, the dollar tends to appreciate. In such an environment, even if Australia’s fundamentals do not worsen, the AUD remains vulnerable to shifts in global risk sentiment. In other words, the AUD’s decline is not due to its own recession but a passive depreciation caused by a super-strong dollar.

Triple challenges: disappearing interest rate advantage, commodity struggles, and dollar dominance

To understand why the AUD “can’t bounce back,” it’s essential to recognize the three key forces driving its movement and their current directions:

First challenge: The interest rate advantage has vanished

The Reserve Bank of Australia (RBA) currently holds a cash rate of about 3.60%, with expectations of another rate hike in 2026. The Commonwealth Bank forecasts a peak around 3.85%. While seemingly high, the Federal Reserve’s policy remains uncertain. If the US economy proves more resilient than expected, the Fed may pause rate cuts or even resume hikes, narrowing the interest rate differential. This would further reduce the attractiveness of the AUD for carry traders.

Second challenge: Structural hit to commodity currency status

Australia’s export structure is overly concentrated in raw materials, which should be an advantage but becomes a disadvantage amid deteriorating global trade conditions. US protectionism, slowing global growth, and especially weakening manufacturing in China directly impact Australia’s export prospects. While iron ore prices may rebound in the short term, long-term trends remain constrained by sluggish global industrial demand. The driving force behind the AUD as a commodity currency is weakening.

Third challenge: Persistent US dollar strength due to global risk aversion

In risk-off environments, investors prefer safe-haven assets like the dollar over the AUD. Weak energy prices and bleak global demand outlooks push capital toward the relatively safe US dollar zone. Even with attractive interest rates, the AUD struggles to attract safe-haven flows during times of heightened risk aversion.

Will the AUD break through in 2026? Diverging views among institutions

Market analysts’ outlooks for the AUD’s future reveal significant divergence, reflecting the uncertainty surrounding its prospects.

Optimistic forecasts

Morgan Stanley predicted the AUD/USD could reach 0.72 by the end of 2025, based on the RBA’s hawkish stance and commodity price support. Traders Union’s models project an average of about 0.6875 in 2026 (range 0.6738–0.7012), with a potential rise to 0.725 by the end of 2027. These optimistic views assume a soft landing for the US economy and a decline in the dollar index, creating room for the AUD to appreciate as a cyclical currency.

Cautious warnings

UBS takes a more cautious stance. Despite Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit AUD gains, with forecasts around 0.68 by year-end. The Commonwealth Bank’s economists suggest the AUD’s recovery may be short-lived, expecting it to peak in March 2026 and then decline again by year’s end. Some Wall Street analysts warn that if the US avoids recession but the dollar remains super-strong, the AUD will struggle to break through 0.67 resistance.

Moderate outlook

Overall, in the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70, heavily influenced by Chinese economic data and US non-farm payroll reports. The AUD won’t crash sharply because Australia’s fundamentals remain relatively solid, and the RBA maintains a hawkish stance. However, it’s unlikely to revisit its all-time highs due to the persistent structural strength of the dollar. Short-term pressures stem from uncertain Chinese data, while long-term upside potential hinges on a potential recovery in Australia’s resource exports and commodity cycles.

Investment outlook and risks for the AUD

The AUD/USD, as one of the top five most traded currencies globally, boasts high liquidity and relatively predictable volatility patterns. Many traders participate via forex margin trading, leveraging 1-200x to seek opportunities in bullish or bearish markets.

However, the core risk in investing in the AUD is that its upside is limited by multiple ceilings. Even if a short-term rebound occurs, the lack of fundamental trend support suggests the currency will likely continue to oscillate within a range rather than trend upward. Carry traders should beware of narrowing interest differentials, commodity investors should monitor Chinese demand uncertainties, and trend traders should be cautious of sharp declines during global risk aversion spikes.

For small- and medium-sized investors, the high liquidity reduces trading barriers but does not eliminate the high risks inherent in forex trading. Losses can wipe out entire capital. It’s advisable to participate only after thoroughly understanding one’s risk tolerance and market conditions.

The AUD can’t go back, but investment opportunities remain

The decade-long weakness of the AUD reflects a profound structural reality: the super-strong dollar cycle is not over, the golden age of commodity currencies has passed, and the appeal of high-yield currencies is waning amid global interest rate competition. For the AUD to enter a genuine medium- to long-term bull phase, three conditions must be met simultaneously: the RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a shift toward structural dollar weakening. If only one or two of these are in place, the AUD is more likely to remain range-bound rather than experience a historic reversal.

This does not mean the AUD has no investment value. For traders, its relatively predictable volatility and high liquidity offer opportunities to generate returns within a defined range. However, expectations should be adjusted: the AUD is unlikely to return to 1.05 but may oscillate between 0.65 and 0.70 for the foreseeable future. With this understanding, technical analysis and risk management can still create short-term trading opportunities, but investors seeking a major rally should recalibrate their strategies.

In short, the AUD can’t go back to its former highs, but its volatility still offers trading opportunities. The key is whether investors can accept the AUD as a currency with rebounds but no clear long-term trend, and adjust their trading strategies accordingly.