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Something unusual has been happening to the Aussie dollar lately: it’s been bucking its reputation for flying high in the economic good times, while plunging when investors get jittery.
At the same time, many market experts predict the currency will remain fairly strong – about US70¢ or higher – for a while yet.
Will these forecasts prove accurate? The honest answer is: “Who really knows?” Any number of things around the world can move exchange rates, which means predicting their movements can be a mug’s game. But even so, there are convincing economic arguments that we should probably get used to a higher Aussie dollar at around these levels of about US70¢ – or slightly higher – for a while yet.
That would not only be good news for people heading on overseas holidays and could also help a bit with our big economic challenge of the day – tackling inflation.
Whether you measure it over 2026 so far, or the past six or 12 months, our currency has had a strong run. At recent levels of about US70¢, it’s come a long way from when it dipped under US60¢ soon after last April’s Liberation Day, when Trump announced his chaotic tariff regime, or from about US65¢ in October. It’s also risen notably against the euro, the Japanese yen, the British pound, and New Zealand’s dollar in the past year.
This strength has surprised some observers because in general, “the Aussie” tends to shine when the global economy is doing well, while falling – sometimes sharply – when investors are nervous. It’s sometimes been dubbed the “whipping boy” of currency markets. This is particularly the case when there’s a big market shock, such as a pandemic or a global financial crisis.
Lately, however, our dollar’s behaviour has been different. As a quick glance at the news most days will tell you, there’s plenty of uncertainty and risk for the global economy, but our dollar has more or less held its own.
It has only slipped slightly since the US launched an attack on Iran, which is just the latest sign that we’re in a more uncertain and unstable geopolitical environment.
So, why has our dollar been fairly buoyant when global uncertainty has been so high? And does this really matter for the economy, or is it just financial market noise? Perhaps the biggest reason for the Aussie dollar’s rebound – and the most convincing reason why it may well stay strong – is the outlook for Australian interest rates.
It is no coincidence that our dollar has taken off as the Reserve Bank has led the world in raising interest rates, while some other countries are still thinking about cutting. Higher rates tend to attract more capital here because Australian assets that pay interest (such as bonds) become more attractive to overseas investors. As more money flows into the country, it increases demand for Aussie dollars and causes the exchange rate to appreciate.
Higher commodity prices are also probably part of the picture, as when we sell shipments of natural resources for a higher price, it increases demand for Australian currency. Even though there’s been plenty of geopolitical turmoil this year alone, the prices of our big exports, such as iron ore, have held up well, which tends to support the exchange rate as well.
Some experts even think we’re now in a commodities “super cycle” once more, which would surely bode well for our currency. The recent jump in the price of oil, unleashed by the US and Israel’s war on Iran, could also boost the value of the nation’s $50 billion a year in liquefied natural gas exports.
But aside from the traditional drivers such as interest rates and commodities, there’s also a less measurable but important influence on our dollar: sentiment.
In particular, negative sentiment towards the mighty US dollar, which has steadily lost ground over the last year or so.
The US dollar has been the world’s dominant currency for roughly the last 80 years, but over the past year, there’s been a debate about whether it may be losing some of this stature, just like the idea of American “exceptionalism” has been questioned. There are plenty of reasons for having such doubts.
There’s the groaning US deficit, the erratic policy-making under Trump, questions about the independence of the US Federal Reserve, the “America First” policy that makes it a less reliable ally, and growing rivalry with other powers such as China.
All these forces have probably weighed on the greenback and led some to question whether it may eventually lose its safe-haven status over the long term.
For now, there’s probably no realistic alternative to the US dollar as a global reserve currency because, for all its many problems, America is still the dominant financial superpower. But while Trump is in the White House, it is hard to see an end to the economic uncertainty that has dogged the US dollar, and therefore helped the Aussie.
So, there are a few reasons why the Aussie could well remain above US70¢: our higher interest rates, high commodity prices, and US dollar weakness.
If our dollar holds on to its gains and remains about US70¢, would it make much difference to our economy, beyond making overseas holidays cheaper?
When our economy’s key challenge is high inflation, a stronger dollar could help by bringing down the cost of imports, and it could also help to dampen economic activity (something the RBA is trying to do by raising interest rates) by making our exports slightly less competitive. But we shouldn’t overestimate the likely size of these impacts.
To have a meaningful effect on inflation, the dollar would probably need to climb higher and stay there for a long time. UBS economists crunched the numbers recently and concluded the stronger exchange rate would have only a “limited disinflation impact” on the consumer price index.
Unfortunately for consumers, the economists said that in this high-inflation world we’re in, it’s possibly easier for retailers to raise their prices. They also pointed out that the recent spike in oil prices would work against any fall in import costs from a higher dollar.
All up, it is reasonable to think our dollar may well hang around the US70¢ range for a while longer, even in a more unstable and uncertain global backdrop.
It may help to dampen our inflation problem a tad, but it won’t be enough to stop the Reserve Bank from raising interest rates again.
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.
Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.From our partners
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