The Australian dollar is enjoying a resurgence as of late, but it’s not down to anything special about our local currency.
In fact, plenty of currencies are performing strongly in 2025, thanks to one surprising laggard: the US dollar.
This week, the greenback chalked up its worst opening half of a year in more than half a century, dropping 10.7 per cent over the six months to June 30.
Not since 1973, when it fell 15 per cent, has it had a weaker start to the year.
The US dollar has been the dominant currency across the globe since the end of World War II, currently used for about 90 per cent of all foreign exchange transactions.
So what’s causing it to go backwards?
In part, it’s a bit of a correction.
“Given the strength in the US dollar in recent years, it has looked overvalued (based on purchasing power parity), especially since the pandemic,” AMP deputy chief economist Diana Mousina wrote early this week.
“So the recent depreciation is probably… a normalisation closer to fair value.”
But there are concerns the slide could continue, and in a year when the dominant finance story has been the tariffs thrown around by the White House, it will come as little surprise that Donald Trump is playing a key role.
A hit to US GDP from those tariffs is weighing on investors, as are concerns about debt levels linked to the president’s “Big Beautiful Act”, and his more America-first approach to foreign policy.
There are also longer-term factors at play – in a more polarised world, the proportion of US dollars in foreign exchange reserves has shrunk from about 70 per cent two decades ago to a tick under 60 per cent today.
All are contributing to concerns that it’s no longer the reliable, safe-haven currency it once was.
“If you cannot with certainty take a view on the position of the US administration, it’s hard to commit capital,” Arun Sai, a strategist at Pictet Asset Management, said.
“What we’ve seen with the current administration in the last few months is that this notion of the US being a default destination for global capital is being challenged.”
In Australia, you’ll pretty much never hear Treasurer Jim Chalmers say “Reserve Bank” without uttering “the independent” first.
Trump has no such qualms about trying to influence his central bank, having constantly belittled Powell in an attempt to get him to lower interest rates, and therefore make borrowing cheaper for the government.
The president has variously labelled Powell “a total and complete moron”, “stupid”, “a dumb guy”, “average mentally”, “a very stupid person”, and “low IQ for what he does” – and that’s just in the last two weeks.
He’s also sent a handwritten note to the Fed demanding ultra-low interest rates, saying the US’s cash rate should be “1 per cent… or better”.
It’s currently above 4 per cent.
Trump has threatened to fire Powell – who he actually appointed during his first term before an extension by Joe Biden – and called for him to resign, and said last week that he already has a shortlist of replacements, fuelling speculation he could announce a successor well before Powell’s term expires next year.
That would be a “terrible idea”, AGF Investments chief US policy strategist Greg Valliere said, as it would be “sure to annoy and confuse the financial markets if there are two Fed chairs”.
“The damage to the Fed’s independence would be considerable if Trump becomes a monetary back-seat driver, second-guessing Fed policies,” he said.
It’s those independence concerns that are proving detrimental to the US dollar.
“One of the key foundations of the strong dollar, of the dollar as a dominant currency globally, is to have an independent central bank,” ING foreign exchange strategist Francesco Pesole said.
“So, if [global investors] feel there is greater influence of politics into the Fed’s decisions, then they are pricing in a greater risk for the dollar.”
That said, there’s no obvious replacement for the greenback as the world’s international currency, despite a host of countries including China, Russia, India, Brazil, Indonesia and South Africa wanting one.
”There has been talk about these countries using a new currency called ‘The Unit’, which would be… a digital currency on the blockchain,” Mousina wrote.
“But setting up a potential new currency faces many hurdles, particularly from the Western world that dominates the financial markets and global payments system.”
There could be a little more good news for Australian travellers to the US, with AMP forecasting the Aussie dollar will buy just under 70 cents by mid-to-late next year.
But against other currencies, it’s likely to remain fairly stable, and the greenback’s slide – if it continues – could have complex and far-reaching consequences.
“If the US dollar loses its safe-haven status, then the Australian dollar may fall less in times of uncertainty,” Mousina said.
“[This] will impact its role as a shock absorber for the Australian economy (like when it fell in the GFC and pandemic, which boosted our exports and supported the economy).
“This may put more pressure on the RBA to support growth in time of global shocks.”
