As we move toward mid-2025, the Australian dollar (AUD) faces a variety of potential scenarios that hinge on the policies implemented by the incoming U.S. administration under President-elect Trump. Analysts from Bank of America (BofA) have outlined three distinct paths that the AUD might take, each reflecting the uncertainty in global trade dynamics. The currency’s performance will be largely influenced by the direction of U.S. economic policy, international trade relationships, and commodity price fluctuations.
BofA’s baseline scenario suggests that the AUD is likely to weaken to approximately 0.63 against the U.S. dollar by the middle of 2025. This outcome is based on an expectation that the trade policies instituted during Trump’s first term will continue, notably through the imposition of tariffs. Additionally, with predictions of moderate gains in U.S. equities — the S&P 500 expected to achieve double-digit returns — the economic landscape could exert downward pressure on the AUD. A crucial factor in this forecast is the anticipated incremental rise in U.S.-China tariffs, which, combined with the ongoing devaluation of the Chinese yuan (CNY), may hamper the Australian economy by reducing demand for its exports.
In a more alarming deviation from the baseline, BofA raises the prospect of a full-blown trade war. Should tariffs escalate sharply, disrupting global trade mechanisms, the AUD could plummet to as low as 0.55 USD. This scenario indicates a larger economic contraction where the CNY experiences significant devaluation and industrial metal prices decline sharply. Such circumstances would exacerbate negative effects on Australia’s economic growth and inflation, potentially keeping the AUD anchored below 0.60 USD for an extended period. The risks associated with this scenario underscore the fragile nature of international relations and trading partnerships.
Conversely, if the new U.S. administration were to adopt an economic strategy reminiscent of Reagan’s policies in the 1980s — typified by tax cuts, deregulation, and minimal trade barriers — the AUD could stabilize and even rise to 0.70 USD. This progressive scenario would foster a robust environment for U.S. equities and enhance stability in the CNY, both of which could work in favor of the AUD. Such a climate would likely bolster investor confidence, stimulating demand for Australian goods and services while reducing downside risks related to global economic fluctuations.
BofA analysts emphasize the heightened sensitivity of the AUD to shifts in global risk sentiment, particularly amid the commodity price landscape and changing relationships with the CNY. Notably, the direction taken by U.S. policy will play a pivotal role in determining the AUD’s trajectory in the coming years. The potential outcomes, from gradual decline to unexpected recovery, illustrate the intricate interplay between domestic and international economic factors. As traders, investors, and policymakers monitor these developments, understanding the vulnerabilities and opportunities ahead will be key in navigating the evolving landscape of currency markets.