Australian Dollar extends gains vs USD as Trump signals US withdrawal from Iran war
- AUD/USD scales higher for the second straight day as Iran de-escalation hopes undermine the USD.
- Easing inflationary concerns temper Fed rate hike bets and further exert pressure on the Greenback.
- The RBA’s hawkish outlook also benefits the Aussie as traders eye US macro data for a fresh impetus.
The AUD/USD pair is seen building on the previous day's recovery move from over a two-month low and gaining traction for the second consecutive day on Wednesday. The momentum lifts spot prices to a fresh weekly high, around the 0.6925-0.6930 region during the Asian session, and is fueled by hopes for de-escalation of Middle East tensions.
The global risk sentiment gets a strong lift after President Donald Trump said on Tuesday that the US could end its military campaign against Iran within two to three weeks. Trump added that Tehran does not have to make a deal with Washington to end the conflict, further boosting investors' confidence. This is evident from a sharp recovery across the global equity markets, which is seen undermining the US Dollar's (USD) global reserve currency status and acting as a tailwind for the AUD/USD pair.
The Australian Dollar (AUD), on the other hand, continues to draw support from the Reserve Bank of Australia's (RBA) hawkish outlook. In fact, Minutes from the March RBA meeting showed on Tuesday that most members judged further rate hikes likely necessary to return inflation to target. Adding to this, China's upbeat PMIs pointed to a modest stabilisation across the wider economy and further benefits the China-proxy Aussie, which turns out to be another factor supporting the AUD/USD pair.
Meanwhile, easing geopolitical risks led to the overnight pullback in Crude Oil prices. This helps ease inflationary concerns and forces investors to trim their bets for an interest rate hike by the US Federal Reserve (Fed) in 2026. The repricing, in turn, keeps US Treasury bond yields depressed and drags the USD away from the year-to-date high, touched on Tuesday. This backs the case for some meaningful upside for the AUD/USD pair as traders now look forward to important US macro releases.
Wednesday's US economic docket features the ADP report on private-sector employment, monthly Retail Sales, and the ISM Manufacturing PMI. Apart from this, speeches by influential FOMC members would drive the USD demand ahead of the crucial US Nonfarm Payrolls (NFP) report, due on Friday. The focus, however, will remain glued to geopolitical developments, which will continue to play a key role in driving the broader risk sentiment and infusing volatility in the financial markets.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
