Australian dollar surges to become best performing G10 currency

The Australian dollar’s long march back to fair value is well under way as US rate cuts loom.

The Australian dollar has been on a tear of late. Picture: iStock

The Australian dollar’s remarkable recovery from the shock of US President Donald Trump’s “Liberation Day” tariff announcements has shifted into overdrive this month, with the currency breaking decisively above the trading range that has contained it since mid-April.

A near 12 per cent rise in the Aussie dollar since its April 8 low makes it the best performing G10 currency in that period. In recent weeks it has accelerated, with a 3.8 per cent rise since August 21.

According to Westpac global economist Elliot Clarke, the US dollar is at risk of a “sustained decline”.

“To stoke US GDP growth back to or above trend, substantial easing will be required,” he said.

“Arguably this is why the market has a further 150 basis points of rate cuts priced in by January 2027, a move that would take the fed funds rate back to a ‘neutral’ 3.00 per cent.

“With only about 50 basis points of further rate expected in Australia, Canada and the UK, and with the ECB’s easing cycle almost done, interest rate pricing is “firmly against the US dollar.”

But, the latest rally in the Aussie also represents a fundamental shift in its recovery pattern.

Unlike the previous four months when the Australian dollar’s appreciation was primarily driven by a weakening US dollar, this month’s gains have been broadly based across its major trading partners.

The currency’s trade-weighted index (TWI) – its price in terms of a group of foreign currencies based on their share of trade with Australia – had mostly tracked sideways around 60.0 for the past few months.

Last week, however, it surged to a 10-month high of 61.5. The TWI has seen an impressive 8 per cent rebound from the five-year low of 56.9 hit during the initial tariff-induced panic in April.

In fact, the currency strengthened against every G10 currency barring the Norwegian Krone last week, rising 1.5 percentage points for AUD/CAD and AUD/JPY.

The shift reflects a confluence of factors working in Australia’s favour.

Iron ore prices have held firm above $US105 per tonne, gold continues its record-breaking run, and the Chinese renminbi has strengthened as money flows back into emerging markets.

A number of factors have been working in the Australian dollar’s favour. Picture: Supplied

“Iron ore prices holding on to the move above $105 a tonne, ongoing gold price appreciation, a falling USD/CNY and an economy that looks to have positive momentum out of what was a strong Q2, are offering plenty of reasons for liking AUD in its own right,” says NAB head of FX research Ray Attrill.

The timing couldn’t be better from a positioning perspective. Speculative markets have maintained near-record short positions against the Australian dollar, creating scope for significant short covering to drive the currency even higher.

AMP chief economist Shane Oliver feels the currency may be entering a new upward trajectory.

“The break above US66c may be a tentative sign that it is moving higher,” he says. “It’s also undervalued versus the US dollar (with fair value around US73c) supporting more upside.”

Historically, a rising gap between Australian and US rates has tended to see a rising trend in the Australian dollar, according to Dr Oliver.

But, the currency’s strength extends beyond simple interest rate differentials.

In a foreign exchange market that has been rediscovering its enthusiasm to sell the US dollar ahead of an expected resumption of the Fed easing cycle, the Australian dollar has benefited from being a standout performer while other major currencies face their own challenges.

NAB’s Attrill highlights how in the short term “there’s also a lot of issues with other currencies” with European currencies facing fiscal sustainability concerns, the Canadian dollar weakening before an expected rate cut this week, and the Japanese yen sidelined by political uncertainty.

Commodity prices also continues to provide solid support for the Aussie dollar.

Iron ore’s surprising resilience above $US100 per tonne, driven by resumed Chinese steel production and tight global supplies, underpins the currency’s appeal as a commodity proxy.

Gold’s record-breaking rally to new all-time highs, historically a plus for the Australian dollar, reflects broader themes of central bank easing and reduced confidence in US dollar dominance.

For Australian businesses and consumers, the currency’s strength brings mixed implications.

Importers will benefit from improved purchasing power, while exporters face headwinds from reduced competitiveness. Overall, a rising exchange rate is seen as a net drag on corporate earnings.

The Aussie, however, tends to track investors’ risk appetite, as does the sharemarket.

The challenge now is whether this momentum can be sustained.

Bloomberg consensus estimates continue to project a steady rise to US70c by 2027.

But, recent momentum raises the possibility that this target could be reached much sooner.

After last week’s break above the post-April trading range of US64c-66c, the Aussie faces another layer of resistance on the chart around US67c, according to IG market analyst Tony Sycamore.

A break above that point would set a short-term target of US69.50c.

Assuming the global risk appetite remains robust and US dollar weakness continues, the Australian dollar’s long march back to fair value is well under way.

Originally published as Australian dollar surges to become best performing G10 currency