Investing.com– There are three potential scenarios for the Australian dollar through mid-2025, contingent on U.S. policy under President-elect Trump, analysts at Bank of America (BofA) said in a note, stating a wide range of outcomes for the currency, reflecting uncertainties in global trade.

In BofA’s baseline scenario, the AUD is expected to weaken to 0.63 U.S. dollar (USD) by mid-2025. This forecast assumes a continuation of tariff-driven trade policies similar to Trump’s first term, alongside moderate gains in U.S. equities, with the projected to deliver double-digit returns.

A gradual increase in U.S.-China tariffs, coupled with a devaluation of the (CNY), is anticipated to exert downward pressure on the AUD. Industrial metals, a key driver for Australia’s economy, are also expected to decline, adding to the currency’s challenges.

BofA’s second, and a more severe scenario envisions a full-blown trade war, where tariffs significantly disrupt global trade. In this situation, the AUD could tumble to 0.55 USD, the bank warned. It cites, a sharp devaluation of the CNY and plummeting industrial metal prices, as major headwinds.

This scenario assumes broader global equity market declines and a more pronounced impact on Australian growth and inflation, potentially keeping the AUD below 0.60 USD for an extended period.

Thirdly, if the incoming administration adopts policies akin to Ronald Reagan’s 1980s approach—characterized by tax cuts, deregulation, and limited trade disruptions—the AUD could climb to 0.70 USD, BofA analysts said. Such policies could spur a rally in U.S. equities and stabilize the CNY, creating a favorable environment for the Australian currency.

BofA underscores the AUD’s heightened sensitivity to global risk sentiment and its evolving relationship with commodity prices and the CNY. Analysts emphasize that significant shifts in U.S. policy will likely dictate the trajectory of the AUD in the near term.

Investing.com – The US dollar rose Wednesday, while the euro retreated ahead of a vote of no-confidence in France later in the day that is likely to topple the fragile coalition government. 

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 106.465. 

Dollar remains compelling

The dollar has been in demand Wednesday, boosted by its safe-haven status amid political turmoil in both South Korea and Europe as well as ongoing conflicts in the Middle East and Ukraine.

“A lame duck government in Germany and potentially France too today if a no-confidence vote is successful, plus this Korean news, will only add to confidence that the relatively high rates and liquidity make the dollar the most compelling currency in which to park cash balances right now,” said analysts at ING, in a note.

Turning back to macro news, all eyes will be on the report for November later in the session, particularly with the widely watched monthly due for release on Friday. 

The release is also on the agenda, as well as a speech from Fed Chair in Washington.

“There is the risk that US macro data softens a little and can drag the dollar a little softer, but taking defensive positions in something like the Japanese yen or Swiss franc can be expensive,” ING added.

Market-implied odds of a quarter-point rate reduction on Dec. 18 last stood at 75%, according to CME’s FedWatch Tool.

Euro pressured by French political crisis

In Europe, dropped 0.1% to 1.0501, with the single currency struggling for support as the French political crisis comes to a head.

French lawmakers are preparing to vote on no-confidence motions later in the day that are all but certain to topple the government, with opposition parties seemingly unable to support Prime Minister Michel Barnier’s recent  budget aimed at curbing a hefty budget deficit.

Additionally, data released earlier Wednesday showed that business activity across the eurozone fell sharply last month as the bloc’s dominant sector joined the manufacturing sector in contraction territory.

HCOB’s final for the currency union, compiled by S&P Global and seen as a good gauge of overall economic health, sank to 48.3 in November from October’s 50.0.

“Be it European political risk, weak activity, the threat of trade wars or energy prices creeping higher (EU gas inventories are starting to come under pressure) there are many reasons to be underweight in the euro,” ING said.

traded 0.1% higher to 1.2677, helped by remaining in expansion territory.

Bank of England Governor Andrew Bailey reiterated in an interview published on Wednesday that gradual cuts in interest rates are likely over the next year, adding that the process of falling inflation is well embedded.

“There is still a distance to travel because although inflation came down to target over the summer, we’ve been saying for a while that … we were probably going to go back a bit above target,” Bailey said.

South Korean won stabilizes

In Asia, stabilized at 1,414.26, after surging as high as 1,444.05 won in overnight trade – its highest level since November 2022.

South Korean President Yoon Suk-Yeol declared martial law on Tuesday in an effort to counter “anti-state forces” among his political opponents. However, the move faced immediate backlash, including parliamentary rejection and public protests, leading him to revoke the measure within hours.

The won also pared initial losses as South Korea’s central bank held an emergency meeting to stabilize the domestic market.

climbed 0.7% to 150.68, while slipped 0.2% to 7.2730, with the Chinese currency bouncing from the previous day’s low of 7.3145, the weakest since November of last year, helped by a stronger-than-expected central bank midpoint fixing. 

slumped 1% to 0.6421, falling to its lowest level since early August after data showed Australia’s economy grew less than expected in the third quarter, sparking increased bets that the Reserve Bank will cut interest rates early in 2025.