Why Is the Australian Dollar So Weak: 4 Reasons Explained

The Australian dollar (AUD) has experienced significant volatility in 2025, dropping below 60 U.S. cents in April — a level not seen since the COVID-19 pandemic.

This decline has raised concerns among investors, businesses, and consumers. However, why Is the Australian dollar so weak compared to before?

This article will explain the reasons behind the AUD's weakness and provide insight into Australia's broader economic landscape and future forecast.

Why Is the Australian Dollar So Weak in 2025? The 4 Factors

1) Global Trade Tensions and Tariff Policies

One of the primary drivers of the AUD's weakness is the resurgence of global trade tensions, particularly between the United States and China.

In early 2025, President Donald Trump announced substantial tariffs on Chinese goods, including a 125% tariff on certain imports. These measures have heightened fears of a global economic slowdown, adversely affecting currencies like the AUD, which are tied to trade dynamics.

In addition, Australia's economy heavily relies on exports to China, its largest trading partner. The imposition of tariffs and the potential for retaliatory measures have disrupted trade flows, reducing demand for Australian commodities and, consequently, the AUD.

2) Domestic Economic Challenges

Domestically, Australia faces several economic challenges that have contributed to the AUD's depreciation. Inflation remains a concern, with prices for essential goods and services rising. While the RBA has implemented measures to control inflation, such as interest rate adjustments, the effectiveness of these policies is still unfolding.

Furthermore, uncertainties surrounding the housing market and consumer spending have dampened economic growth prospects, influencing investor sentiment and the AUD's performance.

3) Commodity Prices and Export Dynamics

As mentioned earlier, Australia's economy heavily depends on commodity exports, such as iron ore, coal, and natural gas. In 2025, global commodity prices experienced volatility due to fluctuating demand and supply chain disruptions.

A slowdown in China's industrial activity has particularly impacted demand for Australian commodities, leading to lower export revenues and a weaker AUD.

Additionally, natural disasters and environmental concerns have affected mining operations, further constraining supply and impacting the AUD's value.

4) Interest Rate Differentials

Lastly, interest rate differentials between countries significantly influence currency values. In 2025, the Reserve Bank of Australia (RBA) has maintained a dovish stance, keeping interest rates relatively low to support economic growth.

In contrast, the U.S. Federal Reserve has signalled potential rate hikes in response to inflationary pressures. This divergence makes U.S. assets more attractive to investors seeking higher returns, leading to capital outflows from Australia and putting downward pressure on the AUD.

Investor Sentiment and Market Perception

1. Institutional Investor Behavior

Institutional investors have maintained a generally bearish tone on the AUD through early 2025 due to its performance relative to other G10 currencies. Hedge funds and asset managers are cautious, citing interest rate divergence and exposure to global geopolitical risk as key concerns.

Recent surveys from global asset managers show a preference for U.S. dollar exposure in the face of risk-off market environments and a shift toward currencies like the Japanese yen or Swiss franc for safety. It has left the AUD under-owned, contributing to its volatility and weakness.

However, some opportunistic investors have begun to look for signs of bottoming. Certain hedge funds and currency desks are turning to commodity trends and trade balance data for signs of a medium-term reversal.

2. Retail Investor Perspective

Retail investors, particularly those involved in currency speculation or global ETFs, have shown a mixed view. Australian-based investors with international exposure have been concerned about higher import and travel costs, prompting shifts into U.S.-based assets or defensive sectors like healthcare and energy. The weak AUD has also driven retail interest in gold and other inflation-hedged investments.

There is also growing interest among long-term investors in buying the AUD at discounted levels, especially if the currency begins to form a base of around 58–60 U.S. cents. These investors argue that the AUD's purchasing power is historically undervalued, based on models like the Big Mac Index and longer-term fair value calculations.

3. Market Commentary and Analyst Consensus

Financial institutions like NAB, Westpac, and HSBC have offered varied projections for the AUD by year-end 2025. While some forecast a mild rebound toward 0.65 USD, others see the AUD remaining suppressed near 0.58–0.60 due to persistent external headwinds.

Common themes across these forecasts include:

• Persistent downside risk if U.S. rates remain higher for longer and China's recovery continues to underwhelm.

• Potential relief rally if U.S. inflation cools and risk appetite improves.

• Medium- to long-term undervaluation, meaning once macro conditions normalise, the AUD could see significant upward reversion.

Future Outlook for the Australian Dollar

On a positive note, Australia's political landscape has provided some stability. The re-election of Prime Minister Anthony Albanese's Labor Party has been viewed favourably by markets, offering a degree of predictability in fiscal and economic policies.

However, this political stability has not been sufficient to counteract the broader global and domestic factors exerting downward pressure on the AUD.

The AUD's future trajectory will depend on several factors:

• Global Economic Conditions: Resolution of trade tensions and stabilisation of commodity prices could support the AUD.

• Monetary Policy Adjustments: The RBA and the U.S. Federal Reserve's decision regarding interest rates will influence capital flows and currency values.

• Domestic Economic Performance: Efforts to control inflation and stimulate growth will be critical in restoring investor confidence.

While challenges persist, strategic policy measures and favourable global developments could pave the way for the AUD's recovery in the latter half of 2025.

Conclusion

In conclusion, the Australian dollar's weakness in 2025 resulted from a confluence of global and domestic factors, including trade tensions, interest rate differentials, commodity price volatility, and internal economic challenges.

While some factors are outside Australia's control, such as international trade disputes, others, like domestic economic policies and interest rates, can be managed to mitigate adverse effects.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.