The locality is about 31 kilometres (19 mi) south-east of the town of Sorell.

Dunalley is approximately 57 km (35 mi) east of Hobart on the Arthur Highway and 20 minutes from Sorell.

It is located on the narrow isthmus which separates the Forestier and Tasman Peninsulas from the rest of Tasmania.

It is common for Sydney–Hobart yacht racers returning to Sydney to use the canal as a convenient shortcut.

[4] Dunalley was badly affected by bushfires on 4 January 2013, with the town losing about 65 structures,[5][6] including the police station, school, bakery and local residences.