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On 6 April, 2025 the Australian dollar reached a five-year low and recorded its biggest daily fall in 17 years, following Donald Trump’s announcement of new global tariffs.
Since then, you probably haven’t noticed a difference in your day-to-day spending. However, if you’ve recently been overseas, the weakness of the Australian dollar is hard to miss.
Many Australians are returning home from international trips stunned by how much of a hit their bank accounts took, compared to when they last travelled abroad. Australians returning from summer Euro trips are especially feeling the pinch, with the AUD to EUR exchange rate hitting an all-time high. These experiences have left many asking: why is the Australian dollar so weak?
We spoke with Deakin finance expert Dr Ruipeng Liu to break down the issue.
Let’s start with the basics.
‘An exchange rate is the price of one country’s currency in terms of another country’s currency,’ says Dr Liu. ‘For example, how much of a foreign currency you can get with one Australian dollar.’
It may sound simple, but with Australians now paying closer attention to every euro, pound or dollar they convert, many are left wondering what’s changed, and why the Australian dollar is suddenly so weak.
As recently as 2019, €50 converted to around AUD $75. However, €50 is now fluctuating between AUD $85-$90, and that difference adds up quickly.
To put that into perspective, a coffee in Europe that once cost $6-7 might now be closer to $9-10. A meal that would have cost you $25 at home could set you back $35 in Europe. Add all of these costs up over multiple days of travel, and your wallet starts to feel emptier pretty quickly.
This is where many travellers start to feel the pinch. Chances are, when catching up with your mates, someone has mentioned struggling to afford their usual shop – or asked outright: why is the Australian dollar so weak?
So, how exactly are exchange rates determined, and why is the Australian dollar so weak all of a sudden?
Dr Liu explains that supply and demand play a major role.
‘In a floating system, exchange rates are determined by the market – specifically, supply and demand for different currencies in the foreign exchange market. If more people and businesses want to buy Australian dollars, its value rises; if more want to sell, its value falls,’ he explains.
In a fixed system, by contrast, a country’s government or central bank sets the exchange rate and maintains it by buying or selling its own currency, or by using foreign reserves.
‘Most countries today use a hybrid approach. Their exchange rate floats, but the central bank intervenes occasionally to stabilise it,’ Dr Liu says.
Now that we know how exchange rates are set, what causes them to shift?
Dr Liu says there’s a mix of factors that drive fluctuations.
‘Exchange rates fluctuate because of supply and demand for currencies, which are influenced by a mix of economic fundamentals, central bank policies, interest rates, inflation, trade, commodities, and investor sentiment,’ he explains.
Interest rates are one of the biggest drivers. Higher rates in a country tend to attract foreign investors seeking stronger returns, boosting demand for that currency.
Beyond interest rates, inflation, economic growth and central bank decisions can also influence change in currency value.
‘High inflation also erodes purchasing power and often weakens a currency. Trade balances also matter; countries with strong exports see more demand for their currency,’ he explains.
Global confidence also has an impact. ‘Beyond fundamentals, market risk sentiment also impacts exchange rates. In uncertain times, investors often move out of riskier currencies into safe-haven currencies such as the U.S dollar, Euro, Pound or Swiss franc.
‘Major commodity exporters like Australia are particularly exposed, since shifts in global economic growth expectations and demand for resources directly affect their currencies,’ he says.
With this in mind, it’s clear global economic uncertainty is a major reason why the Australian dollar is currently so weak.
The conversion from the Australian dollar to the Euro has sparked the most chatter recently, with many young Australians returning from the popular mid-year ‘Euro summer’ break.
So, why is the Australian dollar so weak compared to the Euro? Dr Liu says the pinch Australians are feeling in Europe is largely due to the cash rate being cut multiple times this year.
‘The Reserve Bank of Australia (RBA) has taken a more dovish path, cutting the cash rate three times this year and signalling more reductions ahead,’ says Dr Liu. ‘In contrast to markets expecting Australia to keep easing policy, the European Central Bank (ECB) has been more cautious about easing and creating an attractive yield gap favouring the Euro.’
He also notes that the Australian dollar is in low demand overall, as commodity exports remain weak.
Australia’s economy depends heavily on commodity exports, particularly to China. But with Chinese demand slowing and commodity prices proving volatile, demand for the AUD has reduced.
With falling export earnings and rate cuts at home, it’s no surprise travellers are asking why the Australian dollar is so weak when compared to the Euro.
The conversion from the Australian Dollar to the British Pound (GBP) often feels brutal. Dr Liu says this is due to the Bank of England maintaining a higher cash rate than the RBA.
‘The Bank of England has maintained a higher cash rate, currently 4% compared to the Reserve Bank of Australia, which is currently 3.6%.
‘Markets are expecting further rate cuts in Australia, while rising UK gilt yields – which the interest rates on UK government bonds – have risen sharply. For example, UK 10-year gilt yields rose sharply to around 4.8% recently,’ he explains.
This recent surge in UK gilt yields has the GBP in high demand, whilse reducing demand for the Australian dollar.
‘This spike came as investors anticipated that the Bank of England would maintain high interest rates. This interest rate differential makes GBP-denominated assets more attractive, increasing demand for the pound, and drawing capital flows away from AUD,’ Dr Liu says.
Many investors are keeping a close eye on Australia’s slowing economy and ongoing global trade tensions. Both of these factors increase risk aversion and have led to greater confidence in currencies like the Euro and GBP.
‘The slowing Australian economic growth, combined with weak export demand, has weighed down the AUD. At the same time, global trade tensions increase risk aversion, prompting investors to shift from risk-sensitive currencies like the AUD into safe-haven currencies such as Euro and GBP,’ says Dr Liu.
This interest rate gap, which makes GBP assets more attractive, is pulling investors away from the AUD; this is another clear example of why the Australian dollar is so weak.
Donald Trump’s recently introduced tarrifs are having a huge impact on global exports. The effects are being noticed here in Australia, too – but are they the reason why the Australian dollar is so weak right now?
Well, not exactly – but tariffs do have a big impact on our dollar. If the US imposes tariffs directly on Australian exports, the impact on the AUD can be quite immediate.
Dr Liu says the increase in trade cost reduces the demand for well-sought after Australian commodities.
‘Higher costs for US buyers reduce demand for Australian goods like aluminium, steel, wine and beef, leading to lower export revenues and less demand for AUD in international trade.
‘This weakens Australia’s trade balance and growth outlook, often lowering expectations for interest rate support from the RBA, which puts additional downward pressure on the currency,’ he explains.
Dr Liu says it’s important to note that although many of these tarrifs are not being directed specifically at Australia, we experience the indirect ripple effects.
‘When US tariffs are aimed more broadly, such as against China, the effect on the Australian dollar is indirect but still significant. As China is Australia’s largest export market, slower Chinese growth reduces demand for Australian commodities like iron ore and coal,’ says Dr Liu.
These ripple effects on Australia’s biggest trading partner flow straight back to our own economy, once again raising the question: why is the Australian dollar so weak?
A mix of lobal forces, government decisions, and investor confidence all shape exchange rates, and that’s why the Australian dollar is so weak right now. That’s why Australians are really feeling the pinch, whether at the supermarket checkout or while paying for a coffee overseas.
