The Australian dollar kicked off 2025 on shaky ground. After spending much of late 2024 drifting lower against the US dollar, the AUD/USD pair opened the new year hovering around the 0.62-0.63 range — well below the 0.68-0.70 levels that many traders had hoped for. So what does the rest of 2025 hold for the Aussie?

The US Dollar Remains the Dominant Force

Any conversation about AUD/USD has to start with the greenback. The US Federal Reserve’s rate-cutting cycle, which began in late 2024, has been slower than markets initially priced in. Sticky inflation in services and a surprisingly resilient US labour market have kept the Fed cautious, and that caution has kept the US dollar firm.

For the Aussie to stage a meaningful recovery, we need to see the Fed loosen policy more aggressively — or, at the very least, signal that further cuts are coming. Until then, the interest rate differential continues to favour the greenback.

Commodities: Still the Aussie’s Best Friend (and Worst Enemy)

Australia’s currency has always been a proxy for global commodity demand. Iron ore, coal, and LNG remain the country’s biggest export earners, and their prices are overwhelmingly driven by one customer: China.

Iron ore prices held up reasonably well through late 2024, hovering between US$100 and US$120 per tonne, but the outlook is mixed. Chinese steel production has plateaued, and Beijing’s property sector — historically the biggest driver of steel demand — remains in a prolonged slump. If iron ore slides toward the US$80-90 range, the Aussie will feel it.

On the positive side, copper and lithium could provide tailwinds. The global push toward electrification and renewable energy infrastructure is creating structural demand for these metals, and Australia is a major producer of both.

The RBA’s Balancing Act

The Reserve Bank of Australia enters 2025 in a difficult position. Inflation has been coming down, but not fast enough for the board to declare victory. The trimmed mean CPI — the RBA’s preferred measure — was still above the 2-3 per cent target band at the end of 2024.

Markets are pricing in at least one rate cut from the RBA by mid-2025, but Governor Michele Bullock has repeatedly stressed that the board will not be rushed. If the RBA does cut before the Fed picks up its own pace, the resulting narrowing of the rate differential could actually weigh on the Aussie rather than support it.

The timing matters. A well-communicated, data-dependent cut could be absorbed without too much currency damage. A panicked cut in response to a sudden economic slowdown would be a different story entirely.

Geopolitics and Trade

The return of Donald Trump to the White House has injected fresh uncertainty into global trade. His administration’s tariff rhetoric — particularly aimed at China — has the potential to disrupt the trade flows that underpin Australia’s export economy. Any escalation in US-China tensions tends to hit the Aussie hard, as markets treat it as a liquid proxy for China risk.

On the other hand, if Trump’s trade stance forces Beijing to roll out bigger domestic stimulus packages, that could boost commodity demand and indirectly support AUD.

Where Does AUD/USD End Up?

Forecasting currency pairs over a twelve-month horizon is a mug’s game, but here is a rough framework.

Bear case (0.58-0.62): China’s economy stalls further, iron ore drops below US$90, the Fed stays hawkish, and US-China tensions escalate. The Aussie grinds lower.

Base case (0.63-0.68): The global economy muddles through. The RBA cuts once or twice, the Fed continues gradual easing, and commodity prices hold. The AUD drifts modestly higher.

Bull case (0.69-0.73): China delivers meaningful stimulus, commodities rally, the Fed cuts aggressively, and risk appetite returns. The Aussie catches a bid.

For most of 2025, the base case feels most likely. The Aussie is cheap by historical standards, but cheap can get cheaper if the macro backdrop deteriorates.

What Should You Watch?

If you are tracking the Aussie dollar, keep your eyes on three things: Chinese PMI data (a leading indicator of commodity demand), the US-Australia interest rate spread, and iron ore futures. These three variables explain the vast majority of AUD/USD moves.

It is shaping up to be another volatile year for the currency. Buckle up.

James Hargreaves is a Sydney-based financial journalist covering currencies and macro markets.