Last updated: November 18th, 2024
The AUD/USD’s value has hovered between 64 – 66c throughout 2024. With the US dollar maintaining its stability and China’s economic activity not gaining steam, a sustained strengthening of the Australia dollar seemed out of reach.
However, the Aussie has swung wildly in recent months following:
- US recession fears in August that tumbled global stock markets, heralded rate cuts by the Federal Reserve, and prompted a hawkish tilt by the Reserve Bank of Australia (RBA). The Aussie dropped as low as US63c in early August.
- The Fed’s large 50 basis point cut to the US policy rate in September, bringing renewed optimism around a soft landing — combined with extra stimulus measures from China boosting hopes of growth. The AUD/USD was up around 0.68 – 0.69 in late September/early October.
Let’s explore the factors to watch and find out whether the Aussie will gain more ground.
| Key Takeaways: |
|---|
| The outlook in 2025 is for a strengthening Australian dollar against the US dollar, bolstered by upside surprises to inflation and RBA’s higher-for-longer narrative. |
| Depreciation risks include doubts over Chinese growth and the impact of fiscal spending in the US post the election. |
| RBA’s rate differential with the US Federal Reserve, which has started its easing cycle — with numerous cuts expected — may support the AUD’s appreciation. |
Tip: Zoom out for better historical context of AUD/USD performance.
Australian Dollar Prediction: 2025.
Barring any major catalysts, the general outlook for the AUD/USD exchange rate for 2025 is cautiously optimistic for a strengthening Australian dollar.
(Related: Will Australia Slip Into A Recession In 2024?)
6-Month Forecast For AUD/USD.
Some major banks are forecasting a slight but steady increase in the Australian dollar exchange rate for the second half of 2024:
- Westpac’s economic report issued the week of October 28 predicted the AUD would be worth 0.69 US cents by December 2024 and rise to 70c in Q1 2025.
- NAB’s FX forecast as of August was that the AUD/USD exchange rate would reach 0.69c by December 2024 and 0.71c by March 2025.
- ING is forecasting the exchange rate will be at US$0.69 by Q4 2024, and remain steady at 69c in March 2025.
Despite RBA Governor Michele Bullock saying in August that rate cuts were off the table for at least six months, it’s clear there’s scepticism that our central bank can hold out in the context of global policy easing.
In addition to the US, the following economies have initiated cutting cycles in recent months:
- United Kingdom.
- The EU.
- China.
- Canada.
- New Zealand.
- Switzerland.
- Denmark.
As of late August, Australian traders were again factoring in at least one RBA rate cut before year-end — expectations that Bullock described as “a little bit ahead of themselves”.
Concerns about high underlying inflation led the RBA to hold rates again in October, and the September quarter CPI print further quashed hopes. Core inflation came in at 3.5%.
Above: Traders are less optimistic about policy easing, expecting a 25 basis point cut in May 2025.
Depending on how aggressively the Fed moves, the growing divergence with US policy could bolster demand for the Aussie dollar.
(Related: AUD To Euro Forecast: More Surprises Ahead?)
Chief investment officer of wealth management firm LGT Crestone, Scott Haslem, said that trailing other central banks cuts may be a tool used by the RBA to contain inflation, “as a higher currency will put some downward pressure on import prices (albeit the impact is modest and over time)”.
In the near-term, ING FX strategists Francesco Pesole and Chris Turner said the RBA’s hawkish stance offered good support for the AUD but risks are skewed to the downside due to:
- AUD being vulnerable to any Trump re-election hedging.
- Chinese stimulus not being a lasting bullish driver for proxy currencies or iron ore prices.
Above: Historical snapshot of bilateral and Trade-Weighted Index (TWI) AUD/USD exchange rates. Note that the TWI is more stable.
12-Month Forecast For AUD/USD.
Looking further ahead, bankers expect the Australian dollar to continue to appreciate against the US dollar:
- Westpac predicts that the Aussie’s value will increase to 0.73c by December 2025.
- NAB puts the AUD/USD higher at 0.75c by December ’25.
- ING thinks the Australian dollar will reach US$0.70 by year-end 2025.
(Related: Why Is Living In Australia So Expensive?)
How Is The AUD/USD Exchange Rate Measured?
The RBA explains three key ways to measure an exchange rate:
| Bilateral exchange rate | The most common method, represented by currency pairs that quote one currency’s value relative to another ( e.g., AUD/USD). |
| Cross rate | A rate calculated by reference to a third currency. For instance, determining the EUR/AUD by multiplying EUR/USD by AUD/USD. |
| Trade-weighted index (TWI) | Offers a broader yardstick of trends in a currency’s value, by comparing it against the weighted average value of a ‘basket’ of currencies from trading partners (weighted based on the share of trade with those countries). |
Did You Know?
The AUD/USD currency pair often rises and falls along with the price of gold (read our guide to buying gold in Australia).
What Affects The Value Of The Aussie Dollar?
Throughout 2024, drivers of price movements for the Australian Dollar have included:
1. Domestic Economic Conditions.
In particular, investors monitor:
- Interest rates.
- Inflation (CPI).
- Consumer spending data.
- Labour market figures (recent wage growth was strong but still not on par with inflation).
Above: The latest economic data supports the case for interest rate cuts in early to mid 2025.
Interest rates, inflation and unemployment are particularly important, because:
- When interest rates rise, as now seems less likely (although many forecasts still expect cuts from Q4 2024), our currency delivers a higher return than other major currencies, increasing demand for AUD and its value.
- When purchasing power is reduced (i.e. when you get less ‘bang’ for your Aussie dollar compared to a US dollar), the AUD’s value will likely decline.
- Low unemployment suggests a robust economy and strengthens the currency.
Of course, a track record of cooling inflation is key to a rate-cutting cycle getting underway.
Did You Know?
The Reserve Bank of Australia (RBA) raised the cash rate to 4.35% in November 2023 and has held at that level — including at its most recent October meeting — due to inflation “proving persistent”.
According to Westpac’s Chief Economist Luci Ellis, pushing the exchange rate up helps the RBA achieve its aims by putting downward pressure on the price Aussies pay for internationally traded goods and services.
Ellis added that the timing difference in cash rate cuts supports a view that the AUD/USD will appreciate over 2025.
Important!
Fiscal policy, such as the recalibrated stage-three tax cuts, could also stimulate the Australian economy.
2. US Fed's Interest Rates.
The RBA cash rate currently sits at 4.35%, while the US Federal Reserve's recent 0.50% cut reduced rates to 4.75% - 5.00% — down from a 22-year high of 5.5%.
Above: The Australian Dollar will likely appreciate if the US Fed cuts rates ahead of the RBA.
Important!
This price differential encourages investor funds to flow out of the Australian economy, increasing demand for the USD and devaluing the Australian dollar.
But the interest rate differential is likely to shift to favour the Aussie.
- Optimistic view: The consensus view is the Fed will cut rates by at least 0.25% when it meets in December, with a further 75bp worth of cuts in 2025.
- Pessimistic view: US jobs data looks stronger than feared and Powell said in September the central bank wasn’t in a hurry to normalise rates.
Generally, signs point to policy easing in the US ahead of a similar move by Australia’s central bank (which isn’t expected to cut till Q1 2025, if not raise rates again) — meaning investors will start to find Australian assets more attractive.
Did You Know?
The Australian dollar has a floating exchange rate and is considered a dirty float, as the RBA can intervene in the foreign exchange market to influence the price.
3. China's Economic Slowdown.
The world’s second-largest economy is our largest export market.
Above: Chinese and Australian economies are inextricably linked.
Its economy continues to grow more slowly, despite an increase in industrial profits in July. Data shows industrial production slowed for a third straight month in August, on the back of dismal bank lending indicators.
Earlier in 2024, Chinese stock markets had one of their worst-performing days in years, with the Hang Seng dropping 3.9% and the CSI 300 index declining to a near five-year low.
While Hong Kong’s Hang Seng index has since performed strongly — recent Chinese stock markets gains were pared back in October as new government stimulus plans failed to inspire investor confidence.
The AUD’s value slid as a result, with the Aussie changing hands at around US$0.65 at the time of writing.
In addition to doubts around the impact of China’s fiscal spending:
- Growth forecasts for the Chinese economy range from 4-4.9%, even lower than the modest 5.2% witnessed in 2023.
- Export demand for Chinese goods looks to be declining as global GDP growth remains muted.
- Domestic spending has become more cautious, with weak demand creating deflation risks.
(Related: Best Share Trading Platforms In Australia).
An October market outlook report from Commbank said it's likely that greater support from Chinese policy-makers was coming to prevent more growth slippage:
Important!
Not only does a poorly performing Chinese economy reduce demand for the Aussie dollar, it can encourage capital flows to the US, further strengthening the greenback.
(Related: Interest Rate Forecast: Will The Rates Drop In 2025?)
4. Terms Of Trade And Commodity Prices.
An increased demand for Australian exports means an increased demand for AUD. But export volumes and prices hinge on global demand.
Iron ore is Australia’s largest export, and China is our largest export market.
Iron ore prices hit a seven-week low in early June due to softening Chinese steel demand. A recent Australian Government resources update posits that lower iron prices will reduce national export earnings by close to AU$30 billion this year.
Important!
China’s steel production dropped by 9% in July compared to the same time last year, and further declines are predicted for August.
Whether we like it or not, China’s thirst for our products affects our prosperity and currency strength.
Volatility in commodity prices driven by a range of other factors (e.g., supply chain disruptions or natural disasters) can also create volatility in the AUD foreign exchange rate.
- How much Australian exporters can charge for their goods directly impacts how many Australian dollars are required to purchase the same quantities. More demand for our currency lifts the exchange rate.
- Valuable commodity exports incentivise foreign investment in companies producing those commodities. Additional capital inflow from overseas can further boost demand for the Aussie.
Important!
Of course, some exporters and multinationals benefit from a softer AUD, through more competitive prices or from the favourable conversion of offshore earnings into USD.
5. Global Stability And Geopolitics.
Australia has a stable government, but our financial markets are not immune to increasing instability globally.
Important!
A so-called ‘risk-on’ currency like the AUD doesn’t tend to perform well in times of increased fear, uncertainty, and doubt.
Currency swings could be impacted in 2025 by:
- Whether the US achieves a soft landing supported by expected rate cuts.
- The US Presidential election and how the race influences existing tensions with China.
- The Russian invasion of Ukraine, which has contributed to increased global oil and gas prices (affecting inflation), and continues to negatively impact sentiment.
- Middle Eastern conflicts, including the Israeli-Palestinian conflict, escalation of tensions between Israel and Iran, and recent attacks by Houthi militants on civilian ships in the Red Sea.
Increased geopolitical turmoil can significantly disrupt international trade and fuel ongoing concern about oil prices, which could increase inflationary pressure and a flight-to-safety by investors.
Did You Know?
A January 2024 report on the views of leading chief economists from the World Economic Forum found that 69% expect the pace of geoeconomic fragmentation to accelerate this year, and 87% expect significantly increased volatility in the global economy.
How Stable Is The AUD To USD Exchange Rate?
Historically, the AUD/USD exchange rate has averaged around 0.70-0.75c.
However, it’s dropped sharply on a number of occasions, such as following the attack on New York’s Twin Towers in 2001 and recently during the COVID lockdowns in 2020 when it fell to an 18-year low of 0.55 US cents.
It appreciated against the US dollar in the decade up to 2011, largely driven by Australia’s mining boom, increasing from below US$0.50 in 2001, reaching parity in 2010, and then a peak of over $1.10 in 2011.
(Related: How To Buy Bonds In Australia).
After starting 2023 around the US$0.68c range, the Australian dollar weakened throughout the year, primarily because both local and global economic conditions were not positive, and our currency is risk-sensitive.
Did you Know?
When markets fear a global recession, investors shy away from the Australian Dollar in favour of the US Dollar, a "safe haven". This reduces the demand for the AUD on the foreign exchange markets, weakening its exchange rates.
Will The Australian Dollar Exchange Rate Strengthen In 2025?
Broadly, the predictions point to a rising AUD relative to the USD, but it's yet to be seen if this optimism is warranted.
The interest rate differential story holds promise, but US cuts may be more gradual than anticipated, especially given its economy and jobs market remain robust.
Former US Secretary of the Treasury, Larry H. Summers, said the better-than-expected US jobless rate in October confirmed that caution in rate cutting was required:
AMP’s chief economist Dr Shane Oliver said in May that a Trump victory at the US polls in November could intensify trade wars — particularly with China — that make the Australian economy vulnerable.
How other advanced economies perform and manage their monetary policies will be a key influence on the Aussie’s value.
If risk sentiment improves, if the US Federal Reserve lowers rates rapidly, if the RBA maintains its wariness, and if China’s growth reignites, the outlook for a strengthening AUD is more favourable.
Jody
Nelson says:
I attempted to use the “hack” to dodge conversion fees, but sadly after converting AUD to USD on a Wise account, there doesn’t seem to be a way to deposit that money into eToro; i.e. eToro recently disabled Wire transfers and Wise doesn’t support SWIFT transfers for sending USD to a bank in the US?
John Keys says:
CMC Invest are an abysmal in turning around new accounts.
Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.