The Australian dollar has recently strengthened, but this improvement isn’t solely due to its own merits. Instead, it is largely attributed to the underperformance of the US dollar, which has experienced its worst first half-year in over 50 years, dropping 10.7% as of June 30, 2025. Not since 1973 has the dollar faced such a disadvantageous start, and it now accounts for roughly 90% of global currency transactions.
This decline has been interpreted as a correction, as many analysts believe the dollar was overvalued, particularly in light of its performance since the COVID-19 pandemic. AMP’s deputy chief economist, Diana Mousina, noted that the recent depreciation is a move towards a more realistic valuation. However, worries persist that this downturn could continue, exacerbated by financial policies introduced by the current US administration under President Donald Trump.
Market apprehension is influenced by Trump’s tariffs, which are creating uncertainty regarding the nation’s GDP, and concerns over rising US debt linked to his policies. Additionally, the proportion of US dollars within global reserves has dropped significantly from 70% to just below 60% over the last two decades, signalling a decline in confidence regarding its reliability as a safe-haven currency.
Trump’s approach to the Federal Reserve has further destabilised trust in the US dollar, as he has been openly critical of Fed Chair Jerome Powell in his quest for lower interest rates. His recent actions have raised alarms among investors about the independence of the Federal Reserve, a crucial element for confidence in the dollar’s stability. This has prompted financial strategists to warn that an overreach into monetary policy could lead to even greater risks for the dollar.
Despite the weakening of the US dollar, no current currency stands as a viable alternative in the global economy, even as countries like China, Russia, and India explore the creation of a new currency. Meanwhile, forecasts suggest that the Australian dollar may continue to rise, particularly for travellers to the US, albeit limited by potential interest rate cuts in Australia.
Overall, the dynamics of the global currency market remain complex, with the US dollar’s potential loss of its safe-haven status possibly impacting the Australian economy’s resilience during global economic shocks. As these developments unfold, the Reserve Bank of Australia (RBA) may face greater pressure to stimulate growth in challenging times.