Australian Dollar struggles against softer US Dollar amid geopolitical uncertainty

AUD/USD consolidates losses, balancing a subdued Australian Dollar against a softer US Dollar amid geopolitical uncertainty.
The CME FedWatch Tool suggests that traders price in a 79.5% chance of a December Fed rate hike.
RBA's Chris Kent stated that while the cash rate remains preferred, unconventional tools are ready for future crises.

Akhtar Faruqui FXStreet

AUD/USD remains subdued for the second successive day, trading around 0.6890 during the European hours on Monday. The pair is consolidating its recent losses as a subdued Australian Dollar (AUD) battles a softer US Dollar (USD) amid persistent geopolitical uncertainty.

The downside for the AUD/USD pair remains cushioned after reports emerged that Washington and Tehran have agreed to a temporary halt in hostilities ahead of peace talks resuming in Doha this week.

However, the Greenback's declines are also being capped as traders maintain a cautious stance, closely monitoring fluid Middle East headlines and assessing how regional stability will impact global risk appetite. This sudden diplomatic window opens after days of retaliatory strikes, which began on Thursday when an Iranian projectile struck a cargo vessel, prompting both nations to trade accusations over violating their June 17 interim ceasefire. Official delegations are scheduled to meet in Qatar on Tuesday to negotiate an end to the conflict.

Meanwhile, domestic focus turned to monetary policy following comments from Reserve Bank of Australia (RBA) Assistant Governor Chris Kent. During a review of alternative policy options, Kent highlighted that while the cash rate target remains the RBA's primary and preferred instrument, the central bank is prepared to deploy unconventional tools during future economic or financial crises. Should borrowing costs return to near-zero levels, the RBA could utilize bond purchases, forward guidance, and expanded liquidity measures to support the economy.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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