Australian dollar’s wild swings to continue as ‘King Dollar’ faces challenges

Despite being the worst-performing G10 currency in fiscal 2025, modest gains are expected for the Australian dollar as the US confronts questions over its reserve currency dominance.

The Australian dollar was the worst performing G10 currency against USD in FY25.

As the US grapples with a toxic mix of policy uncertainty, unsustainable debt levels and declining global confidence, the days of taking American economic dominance for granted appear numbered.

With US growth forecasts coming down, the budget deficit running at 7 per cent of GDP, and global central banks steadily reducing their US dollar reserves, America’s 80-year reign as the world’s financial anchor faces its most serious challenge yet.

Amid extreme volatility in global markets this year and US President Donald Trump starting a trade war before dialling it back somewhat, the Australian dollar was the worst performing major currency against the greenback in the last financial year. Its future still depends on what happens in America.

Bloomberg consensus estimates have the local currency rising steadily to 70c by 2027 as the US faces growing questions about its role as the world’s top currency.

After hitting a multi-year high of US69.42c last September as the US dollar faltered after an outsized interest rate cut by the US Federal Reserve, the Aussie dollar hit a post-Covid low of US59.15c in early April.

Despite a sharply falling US currency, the Aussie succumbed to its “risk proxy” status as Mr Trump’s Liberation Day tariffs announcement on April 2 proved more serious than expected.

But, since then, the Aussie has soared to an eight-month high of US65.90c. The rebound came as Trump de-escalated the trade war with pauses on reciprocal tariffs and retaliatory tariffs of China, Israel and Iran reached a truce after the US bombed Iranian nuclear facilities and the US dollar fell on expectations of a weakening economy and Federal Reserve interest rate cuts amid intense pressure from Mr Trump.

NAB’s FX strategists note the Aussie dollar’s rebound has been “a USD-driven affair”.

With average US tariff rates set to jump from 3 per cent to around 15 per cent after a 90-day pause on “reciprocal tariffs” ends on July 9th, markets are now trying to work out what this means for global trade and growth. The uncertainty has grown worse due to Trump’s harsh attacks on Federal Reserve Chair Jerome Powell, demanding big rate cuts of 200-300 basis points.

NAB FX strategists said the $A rebound was driven by the USD.

In the current financial year, the Australian dollar faces a complex landscape shaped by America’s internal problems. AMP’s analysis suggests the US confronts multiple unknowns: policy uncertainty, government debt concerns, and potential tax changes which could make US assets less attractive.

The numbers paint a grim picture for American dominance.

US GDP growth forecasts for 2025 have been cut by at least 0.3-0.4 percentage points, with most expecting just 1.5 per cent growth this year and below 2 per cent in coming years.

Meanwhile, the budget deficit runs at around 7 per cent of GDP with little chance of major cuts.

AMP deputy chief economist Diana Mousina argues this environment of continued US policy uncertainty and the dollar’s return to “fair value” levels means a lower US dollar is likely in the near term. Crucially, she notes Trump and his team may actually favour a weaker currency, as a strong US dollar will hurt export growth and the Republicans want to see a lower US trade deficit.

For the Australian dollar, this creates room for modest gains ahead. Ms Mousina sees it lifting slightly to 65 US cents by end-2025 and just under 70 cents by mid-to-late 2026. However, big gains remain limited by the RBA’s expected rate cuts over the next 12 months, outpacing its peers.

On a trade-weighted basis — the measure which matters most for Australia’s economy — the currency is expected to stay largely flat. As AMP’s Ms Mousina explains, a lower US dollar means more support for the euro and yen, so it’s hard to see much movement for the $A Trade Weighted Index.

The longer-term effects go beyond exchange rates. Global central banks have steadily cut their US dollar foreign exchange reserves from around 70 per cent in the early 2000s to under 60 per cent.

While other reserve currencies are hard to find despite BRICS nations’ talks of a gold-backed digital currency called “The Unit”, the trend suggests a slow erosion of America’s money dominance.

For Australia, this changing landscape brings chances and challenges. Mousina highlights a key risk: if the US dollar loses its safe haven status, the Australian dollar may fall less in times of uncertainty, which will impact its role as a shock absorber for the economy.

This traditional role saw our currency fall during the GFC and pandemic, which boosted exports and supported growth. Without this buffer, more pressure may fall on the RBA to support growth during global shocks.

The currency’s fair value, according to purchasing power measures, sits around US72c — suggesting current levels remain well below long-term balance, despite recent gains.