Australian Dollar Hits 2-Month Low

The Australian dollar weakened to around $0.687 on Friday, hitting a two-month low as fears of a prolonged energy shock from the Middle East war clouded the global growth outlook and dampened demand for commodities. Support from relatively higher Australian interest rates is starting to fade, as markets increasingly expect further tightening across other major economies, narrowing the yield advantage. At the same time, a steep rise in petrol prices is expected to feed into domestic inflation while also squeezing household spending. Economists warn inflation could accelerate further, with headline CPI potentially rising toward 4.5% soon and even approaching 5% in Q2 if energy costs remain elevated. Earlier, RBA Assistant Governor Christopher Kent had already cautioned that a prolonged Gulf conflict could weigh on growth, even as they remain focused on keeping inflation expectations anchored. Markets currently imply a 68% chance of a May hike and see rates reaching 4.75% by year-end.

The Australian dollar traded below $0.695, holding steady at a seven-week low as investors remained skeptical of a near-term Iran war de-escalation, while the RBA flagged rising inflation risks from global oil shock. The central bank warned that a prolonged conflict-driven supply shock could lift both inflation and long-term expectations, potentially requiring a more restrictive policy stance. Assistant Governor Chris Kent noted that such shocks tend to push prices higher while weighing on growth, limiting the ability of policy to fully offset the impact and instead shifting the focus toward preventing inflation from becoming entrenched. Meanwhile, uncertainty around the conflict continued to cloud sentiment, with conflicting signals from the US and Iran over potential negotiations. While Washington indicated efforts to advance talks and ease tensions, Tehran pushed back against ceasefire proposals, and increased US troop deployments in the region added to fears of further escalation.

The Australian dollar edged down to around $0.70 on Wednesday, approaching a two-week low as caution persisted around US President Trump’s efforts to end the Iran conflict, while investors weighed softer domestic inflation figures. Consumer prices were unchanged in February from the previous month, while annual inflation slowed to 3.7% from 3.8%, slightly below expectations. Underlying inflation also came in weaker than forecast, suggesting some gradual cooling in core pressures. However, inflation remains above the central bank’s 2–3% target range, keeping the policy outlook uncertain. Markets see the odds of another rate hike in May as evenly balanced, while around 65 bps of additional tightening is still priced in for the rest of 2026. Meanwhile, reports indicated the US was pursuing talks with Iran, including a proposed one-month ceasefire and a 15-point plan to resolve the conflict. Still, the deployment of US ground troops to the region signaled that risks of escalation remain.