Against many economies, the US dollar remains the strongest it has been in years. In March 2020, at the start of the pandemic, the USD/AUD exchange rate hit a high of 1.72. As of January 2024, 1 US dollar is worth 1.53 Australian dollars.
This strength continues post-pandemic because as economies battle inflationary pressures, there have been fears of a global recession—fears that continued throughout 2023 and have abated somewhat but still persist at the start of 2024.
As ANZ’s head of FX research Mahjabeen Zaman told Forbes Advisor Australia, those ongoing fears have actually strengthened the US dollar against other currencies, including the Australian dollar.
“That’s because of relatively stronger economic fundamentals in the US compared to the rest of the world, which provide USD with the view of being a ‘safe haven’,” Zaman explains.
Comparatively, the Australian dollar is a pro-cyclical currency, Zaman says. This simply means it appreciates in good times, and depreciates in bad times. So with the Covid-19 pandemic, the cost-of-living crisis and lingering recession fears, the AUD has been depreciating in value. But will that continue in 2024?
Related: AUD to USD Forecast
The US Dollar’s Performance in 2023
The US dollar had another strong year in 2023, largely due to the easing of Covid-19 pandemic restrictions, leading to nation-wide economic recovery. The US Federal Reserve started raising interest rates in May 2022, to help take the heat out of the economy and bring down inflation.
In September, Reuters reported that the USD’s strength will be “difficult to overcome” for most major currencies by year-end, according to a poll of forex strategists who said “the risks to their greenback outlook were skewed to the upside”.
Additionally, by the end of 2023, the US had lowered inflation to 3.4%, while Australia’s headline inflation figure for the December quarter was still higher at 4.5%.
On December 31 of 2023, $US1 was equal to $1.49 AUD.
AU Dollar Performance and Drivers in 2023
Along with its pro-cyclical nature, Zaman says that the risk sentiment in the market is a prime driver of the Australian dollars strength against USD.
“We saw in 2023 that weaker risk sentiment hamstrung rallies in the AUD/USD. Local factors, such as a more hawkish RBA, better economic data, or signs of rising inflation, provide little lasting support beyond a 24- to 48-hour window,” Zaman says.
“Additionally, the [US] Federal interest rate and US economic outlook are relevant factors for the USD/AUD trajectory.”
At the start of 2023, one Australian dollar was worth $US0.6802. Unfortunately, this downward trajectory continued for the majority of the year—with the Aussie dollar hitting a yearly low in October to a conversion rate of $US0.6288.
By the end of the year, the AUD/USD conversion rate had increased from to $US0.6702, however, this was still lower than the start of the 2023. At the time of writing, the exchange rate has dipped further again, falling slightly to $US0.6691.
USD to AUD Forecast
In terms of currency, the USD to AUD conversion currently sits at $US1 to $1.53 AUD at the time of writing (a slight increase from December 31, 2023).
Speaking to Reuters, Jane Foley, head of FX strategy at Rabobank, said it is expected that the USD’s strength has “got further to run and will sustain over the next three months”.
Australia’s Reserve Bank rate rises appear to be nearing the end of their current cycle, and it’s worth noting the US has also begun to slow down its pace of hikes after numerous rate rises during 2023.
According to a median view of nearly 70 foreign exchange strategists, the US dollar is expected to “weaken modestly against most major currencies [within the] year,” Reuters reported, as the US Federal Reserve begins to move on interest rate cuts.
“In the next six to nine months, we are expecting the Fed to start to cut rates and it’s at that point where we think that the dollar will re-weaken again,” said Lee Hardman, senior currency analyst at MUF told Reuters.
Australian banks are taking statements from overseas as a sign of good news to come, with risk sentiment gradually improving over the year should the global economic outlook settle further, Zaman says.
For example, NAB’s Australian dollar forecast is predicting the AUD will trade at $US0.73 by December 2024.
“Over the long-term NAB is optimistic and believes the Australian dollar will reach $US0.78 by December 2025,” NAB reports.