Australian Dollar weakens as Iran rebuffs Trump’s plan for new round of peace talks

AUD/USD tumbles to around 0.7140 in Monday’s early Asian session.
Iran denied upcoming talks with the US.
Hawkish RBA stance might cap the downside for the Aussie.

Lallalit Srijandorn FXStreet

The AUD/USD pair attracts some sellers to near 0.7140 during the early Asian session on Monday. Escalating tensions between the US and Iran continue to weigh on the Australian Dollar (AUD) against the US Dollar (USD). The US March Retail Sales report will be in the spotlight later on Tuesday.

The Iranian state TV reported on Sunday that Tehran rejected new peace talks with the US following US President Donald Trump's post on Truth Social, indicating US representatives were heading to Pakistan for another round of negotiations on Monday.

Iran has blocked the Strait of Hormuz since the US and Israel struck on February 28. On Friday, it announced that the waterway would reopen. However, it reversed that decision on Saturday after Trump declined to lift a US blockade of Iranian ports. Iran’s decision to walk away from negotiations and ongoing geopolitical risks could boost a safe-haven currency such as the Greenback and create a headwind for the pair in the near term.

On the other hand, the hawkish stance of the Reserve Bank of Australia (RBA) might help limit the AUD’s losses. Markets have priced in nearly a 70-72% probability of a third consecutive hike to 4.35% at the May 5 meeting, driven by sticky inflation and a resilient labor market.

(This story was corrected at 23:30 GMT to say, in the first bullet point, that AUD/USD tumbles to around 0.7140 in Monday’s early Asian session, not Friday.)

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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