After several years of steadily declining, the Australian dollar staged a meaningful recovery in 2025, culminating in a two-cent rally over the past month. <\/p>\n
Since the start of the year, the value of the Australian dollar has risen by more than 6% against the US dollar, reversing a sizeable chunk of the falls that occurred through 2022\u201324.<\/p>\n
But is the most recent jump the start of a new trend for 2026? Or just another blip?<\/p>\n
Why US rate cuts move the Australian dollar<\/p>\n
Last week the US central bank, the Federal Reserve, cut interest rates<\/a> for the third time in a row \u2013 down by 0.25 percentage points to around 3.6%, its lowest level in nearly three years. <\/p>\n That decision came just after the Reserve Bank of Australia (RBA) kept rates on hold<\/a> at 3.6%. The RBA governor, Michele Bullock, also signalled more rate cuts here are unlikely for \u201cthe foreseeable future<\/a>\u201d.<\/p>\n In the days immediately after the US Fed\u2019s decision, the Australian dollar did what textbook economics would predict: it rose, briefly hitting a three-month high of around US$0.667.<\/p>\n The link between US monetary policy and the Australian dollar is often misunderstood. <\/p>\n A US rate cut does not directly make Australia richer or poorer. Instead, it alters global financial conditions in ways that matter for currencies.<\/p>\n The most straightforward way US decisions affect us here in Australia is with interest-rate differentials. That means when US interest rates fall relative to Australian rates, holding US dollar assets (such as US bonds<\/a>) becomes slightly less attractive. That can reduce demand for the US dollar and support overseas currencies like ours.<\/p>\n There is also a broader \u201crisk appetite\u201d effect. When the Fed lowers its key interest rate, markets often interpret that as being supportive of global growth and financial conditions, at least initially. That can boost demand for riskier assets \u2013 including shares in Australian companies and the Australian dollar itself.<\/p>\n Finally, markets react not just to what the Fed does in a given meeting, but to what it signals about the future. <\/p>\n Last week\u2019s rate cut came with a relatively cautious message<\/a> about further rate reductions. That limited the downside for the US dollar and helps explain why the Australian dollar\u2019s rally faded fairly quickly, rather than accelerating.<\/p>\n Pressure on the US Fed for more cuts<\/p>\n However, this outlook may change quickly after US President Donald Trump said he was close<\/a> to appointing a new Federal Reserve chair. This looks likely to be announced<\/a> unusually early in the new year. <\/p>\n Trump has been outspoken<\/a> in calling on the Federal Reserve to cut rates more aggressively.<\/p>\n While presidents have occasionally expressed views about monetary policy, explicit pressure<\/a> can affect market perceptions of central bank independence<\/a> \u2013 and perceptions matter in currency markets.<\/p>\n If the next chair is less willing or able to resist political pressure and cuts rates further in the face of still-high inflation, that could weaken the US dollar further.<\/p>\n For the Australian dollar, this could cut both ways. <\/p>\n A weaker or more volatile US dollar could led to more support for the Australian dollar. But heightened global uncertainty can also trigger bouts of risk aversion that tend to hurt cyclical currencies such as Australia\u2019s.<\/p>\n Read more: What will the RBA do if inflation persists?<\/p>\n Domestic monetary policy will also matter. The Reserve Bank influences the exchange rate primarily through expectations about future interest rates.<\/p>\n
\n Trump is close to naming the new Federal Reserve chief. His choice could raise the risk of stagflation<\/a><\/p>\n