After hitting a five-year low, does the Australian dollar have further to fall as the trade war plays out?

The Australian dollar plunged to a five-year low earlier this week as President Trump's tariffs rattled markets around the world.

Australia's currency was hit on multiple fronts, dipping to US$0.5929 at one point on Wednesday.

As trade tensions heated up between the US and China, concerns for the Aussie dollar's outlook heightened.

Fears surrounding the economic impact of the tariffs on Australia's biggest trading partner were factored into the price of the Aussie dollar.

The sell-off was also likely triggered by the increased odds of the Reserve Bank of Australia cutting interest rates when it meets next month.

This week, National Australia Bank Ltd (ASX: NAB) predicted that the RBA would cut interest rates by 0.5 percentage points.

That would bring the current cash rate of 4.10% down to 3.6%. 

The bank further predicted that the RBA would continue with the cuts, bringing the cash rate down to 2.6% by February next year.

Meanwhile, the Reserve Bank of New Zealand pressed ahead with its rate-cutting cycle, bringing the benchmark rate down by 25 basis points to 3.5%.

So where does the Aussie dollar go from here?

It can be notoriously difficult to predict the future of the Aussie dollar.

But it can also be quite simple, particularly in times of extreme volatility.

Let me explain.

Easy money

In early 2020, as the pandemic put extreme downward pressure on Australia's currency, the Aussie dollar hit a low of US$0.5510.

Around that time, I could clearly see that the Aussie dollar was squarely in the buy zone and well below the long-term average of US$0.75.

So, I started to buy.

At the time, my only concern was that I was limited by the amount of foreign currency I held.

Similarly, on the flip side, back in 2010, the Aussie dollar started to surge against the Greenback.

As soon as the Aussie dollar hit parity with the USD, I started buying as many US dollars as I could get my hands on.

Again, looking at the long-term average, it seemed like an easy decision.

Anyway, if it all went wrong, I could always take a trip to Disneyland.

Tough way to make a buck

But making money from currency trades isn't always a walk in the park.

Just ask Australia's top economists.

Ivan Colhoun, Consulting Economist for the Bank of Sydney, made an interesting point earlier this year:

As we start 2025, the latest AFR (Australian Financial Review) survey of economists again expects the AUD to rise over 2025 to US$0.65 on 30 June and further to US$0.67 by year's end. Notably, none of the 36 economists surveyed expect the AUD to fall below its current US$0.62 level by mid-year, and only two anticipate a further decline by year-end.

I either don't know enough or know too much to make a call on where the Aussie dollar is heading in the short term.

But looking further down the road, my money is on the Aussie.