Morgan Stanley predicts that the Australian dollar will be one of the most outstanding currencies in 2025.

Morgan Stanley predicts excellent performance of Australian dollar in 2025

Morgan Stanley's global strategy report states, "Within the US dollar system, we expect the Australian dollar to continue to perform exceptionally well

Strategists believe that due to sensitivity to risk, the Australian dollar may rise to 0.72 against the US dollar by the end of 2025. The Australian dollar is considered a 'high beta' currency, meaning it has a strong positive correlation with global stock markets. When investor sentiment is positive and the stock market rises, the Australian dollar also benefits.

Morgan Stanley predicts that the first year of Trump's second term will be characterized by moderate growth, deflationary pressure, regulatory easing, and monetary easing policies, all of which are favorable for risk assets.

Morgan Stanley believes that although higher trade tariffs in 2025 have had a negative impact on economic growth and the Australian dollar, these adverse effects will be partially offset by the decline in US interest rates.

Morgan Stanley points out that a decrease in real interest rates should limit the strong performance of the US dollar; The Japanese yen and Australian dollar will be the best performing G10 currencies.

Morgan Stanley believes that Australia's "limited trade risk exposure" and relatively tough Reserve Bank of Australia will provide support for the Australian dollar. Our economists predict that the Reserve Bank of Australia will cut interest rates for the first time in May 2025, and the Reserve Bank of Australia's cash rate may become the highest among G10 countries after the Fed

Morgan Stanley is bullish on the pound and euro, but bearish on the Swiss franc

Among other performances in the foreign exchange market, Morgan Stanley expects the pound to benefit from positive risk sentiment and receive additional support due to limited trade-related risks and favorable spreads. The pound against the US dollar is expected to rise to 1.34 by the end of 2025, which means the forecast for the pound against the Australian dollar has decreased from the current 1.94 to 1.86.

The Swiss franc is considered the worst performing currency, with the euro expected to rise to 0.95 against the Swiss franc by the end of 2025.

The euro exchange rate is expected to be suppressed by rapidly declining interest rates, sustained below trend economic growth, and trade risk premiums.

Morgan Stanley economists predict that the European Central Bank will continue to cut interest rates, bringing the policy rate below the neutral rate, which means it will be lowered to a level that can stimulate the economy.

Morgan Stanley said, "In fact, our interest rate strategists expect Germany's 2-year yield to approach Japan's level, which puts pressure on the euro as it converges with other financing currencies, especially in the face of a sharp contrast between low interest rates and the Federal Reserve's rates. We expect the Federal Reserve to stop cutting interest rates by 2025, and US interest rates will remain nearly 250 basis points higher than the European Central Bank, at 3.5-3.75%

Morgan Stanley predicts that the euro against the US dollar will rise slightly from 1.04 at the end of 2024 to 1.10 at the end of 2025, but with limited gains compared to other major currencies.

AUD/USD daily chart