Strategists are preparing for the Reserve Bank of Australia's update to monetary policy due later this week because it could serve as a catalyst to drive the dollar up or down after a week of steady trading.
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The Australian dollar hovered between US72¢ and US73.2¢ on Monday, fetching US72.9¢ in late trade after climbing as high as US73.5¢ on Friday.
The Aussie is tipped to slide this week as it continues its downward trend that could take it below US70¢ by the end of the year. The currency fetched more than US80¢ as recently as mid-May.
Analysts are forecasting the decline because the US dollar is set to strengthen while Australia will continue to be buffeted by slowing Chinese growth and low commodity prices.
While the falling raw-material prices have hurt the currencies of fellow commodity-dependent economies such as Canada and New Zealand, the National Australia Bank's global co-head of foreign exchange strategy said the Australian dollar has particularly struggled.
"The Australian dollar has underperformed alongside commodity-based emerging-market currencies in recent weeks, losing 5.4 per cent against the US dollar and marking it as the fourth-worst-performing currency across the entire [foreign exchange] universe in July," Ray Attrill said.
"Weakness relative to our short-term model valuations is glaring but this doesn't lead us to expect a significant near-term bounce."
The key domestic economic event this week will be the RBA's monthly rates decision on Tuesday and its Statement on Monetary Policy due on Friday.
The overwhelming view among economists is that the central bank will keep its official cash rate target steady at 2 per cent this week. That means Friday's statement is set to have potentially greater impact as the RBA battles with below-trend growth as the economy struggles to transition from the mining boom.
BetaShares chief economist David Bassanese said he was expecting no change to interest rates while the dollar would continue to sink in value.
"The bottom line is that I still expect the RBA to cut rates to 1.5 per cent but the timing has been pushed out to mid-2016. My call on the Australian dollar remains in place, with a decline to US68¢ by year end still quite plausible."
ANZ analysts said they were anticipating the bank could lower its unemployment forecasts should official jobs data, due Thursday, come in stronger than expected.
National Australia Bank senior economist David de Garis said the market would be alert to any changes in how the RBA characterises the economy and currency in this Friday's statement.
"We expect that the RBA will need to address how much spare capacity the economy has at present and into the future given lower likely sustainable growth," Mr de Garis said.
He said RBA governor Glenn Stevens' comments in a recent speech about the lower exchange rate being part of a "necessary adjustment" away from mining-led economic growth were also important.
"Adding this embellishment [to the statement] would leave it suitably vague as to what the RBA thinks about valuations, though potentially less obviously overvalued in the central bank's eyes.
"While this would risk a knee-jerk move higher in the Australian dollar, it needn't be a big one given the limited reaction to his amended language last week, and given the strength of prevailing negative sentiment towards commodity currencies in general."
