As a finance professional (and a keen traveller), it’s essential to keep a close eye on factors influencing the Australian Dollar (AUD), especially given recent fluctuations. Let’s delve into what drives currency movements, recent changes in the AUD, and what might lie ahead.

What Influences Currency Exchange Rates?

Currency values are primarily determined by supply and demand dynamics in the foreign exchange market. Key factors include:

• Interest rate differentials: Higher interest rates in Australia compared to other countries can attract foreign investors seeking better returns, increasing demand for the AUD and potentially leading to currency appreciation. Conversely, lower rates can have the opposite effect.
• Commodity prices: Australia’s economy is heavily reliant on commodities like iron ore, coal, and gold. Rising commodity prices can boost export revenues, increasing demand for the AUD.
• Global economic sentiment: In times of global economic stability, investors may seek higher-yielding assets, benefiting currencies like the AUD. During uncertainty, there might be a shift towards “safe haven” currencies, leading to AUD depreciation.
• Trade balances: A surplus in trade (exports exceeding imports) increases demand for the AUD, while a deficit can increase its supply in the market, affecting its value.

Recent Movements in the AUD

In early February 2025, the AUD has experienced notable fluctuations. On February 7, 2025, it reached a high of 0.63 USD, while on February 3, it dipped to a low of 0.61 USD.

Several factors have contributed to these movements:

• Global trade tensions: Recent announcements from the U.S. regarding increased tariffs on steel and aluminium imports have heightened global trade tensions. Such uncertainties can lead to a stronger USD as investors seek safe-haven assets, often resulting in a weaker AUD.
• Domestic economic indicators: Lower-than-expected inflation figures in Australia have led to expectations of interest rate cuts by the Reserve Bank of Australia (RBA). Money markets predict a 93% chance of a rate cut in the upcoming meeting, which could further influence the AUD’s value.

The Trump Factor

U.S. President Donald Trump’s recent announcement of imposing 25% tariffs on steel and aluminium imports has sent ripples through global markets. While Australia is a minor exporter of these metals to the U.S., the broader implications of such trade policies can influence global economic sentiment and, by extension, the AUD. Following the tariff announcement, the Australian share market saw a significant drop, wiping off over $15 billion in value.

However, it’s worth noting that Trump has agreed to consider exempting Australia from these tariffs, acknowledging the trade surplus the U.S. enjoys with Australia. This potential exemption could mitigate some negative impacts on the AUD.

Looking Ahead: Short and Long-Term Considerations

In the short term, several factors could influence the AUD:

• Monetary policy decisions: Anticipated rate cuts by the RBA may lead to a depreciation of the AUD as the interest rate differential narrows.
• Global economic developments: Ongoing trade negotiations and geopolitical events will play a crucial role. Positive resolutions could bolster the AUD, while escalations might exert downward pressure.

Over the long-term strong demand for Australia’s key exports, especially from major trading partners like China, will be pivotal. Any significant changes in global commodity demand could have lasting impacts on the AUD. Australia’s efforts to diversify its economy beyond commodities could provide more stability to the AUD, reducing its vulnerability to commodity price swings.

Currency markets are inherently volatile. The AUD’s value is influenced by a complex interplay of domestic and international factors – staying informed about these drivers will aid in making well-informed financial decisions.