The Australian dollar is on track for its first annual gain since 2020, driven by high interest rates set by the Reserve Bank of Australia (RBA) and an economic boost from expected stimulus measures in China, Australia’s largest trading partner.
Westpac Banking Corp. and Bank of America Corp. predict that the Aussie could rise to as high as 68 cents by December, marking an 8.4% increase from Friday’s close. Meanwhile, National Australia Bank Ltd. and Westpac expect the currency to climb to 65 cents by the end of June, despite some initial volatility.
The RBA’s decision to maintain high interest rates instead of easing has helped support the Australian dollar, with investors closely monitoring inflation data this week to assess the central bank‘s cautious approach. Additionally, China’s pledge to counteract US tariffs through domestic spending has further bolstered the currency’s appeal.
Market analysts are also noting the potential impact of President Donald Trump’s aggressive trade policies, which are expected to slow US economic growth and weaken the dollar. According to Bank of America strategist Oliver Levingston, the Australian dollar will likely see a gradual recovery starting in the second quarter, driven by dollar depreciation and the delayed effects of China’s stimulus in the second half of 2025. A higher RBA terminal rate, resulting from persistent inflation, is also expected to support the Aussie.
Economists anticipate that the RBA will maintain its current stance on interest rates next month, following its decision to lower borrowing costs for the first time in four years in February. Policymakers have expressed caution about further easing until more evidence of inflation control is available.
“We believe the current terminal rate pricing is too low,” said Andrew Ticehurst, senior strategist at Nomura Holdings Inc. “The Aussie is currently trading below its ‘fair value’ based on historical relationships with commodity prices and rate spreads.”
After falling nearly 10% in 2024, the Australian dollar has gained 1.3% this year. Hedge funds have significantly reduced their bearish positions on the currency since January, according to data from the Commodity Futures Trading Commission.
Despite these positive outlooks, the Aussie remains vulnerable to volatility. Westpac warns that the currency may dip below 62 cents as market risk positions are adjusted, particularly as President Trump’s trade tariffs deadline in April approaches. Australia’s lobbying efforts to gain an exemption from US steel and aluminum duties have been unsuccessful, raising concerns that major exports to the US may be affected.
However, concerns over US economic weakness and trade aggression could further undermine the dollar. The US dollar has fallen by 3% this year, as markets anticipate a dovish shift from the Federal Reserve and increasing fiscal spending in Europe, diminishing the trend of US economic dominance.
Richard Franulovich, head of currency strategy at Westpac, sees a “significant regime shift” away from the US dollar, paving the way for a sustained rise in the Australian dollar.
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