Australian Dollar Stays Near 4-Year Peaks

The Australian dollar fell around $0.72, but remained near its highest level since April 2022 as markets monitored developments surrounding the Middle East conflict. The US and Iran continue to struggle toward a diplomatic resolution to the conflict, while the Strait of Hormuz remains effectively closed, keeping energy prices elevated and intensifying inflation concerns. Last week, Australia’s central bank sharply raised its inflation forecasts, seen peaking near 5%, while downgrading the outlook for economic growth amid the global energy shock from the Gulf. The updated forecasts come as policymakers lifted rates to 4.35%, the third consecutive hike of the year. Meanwhile, rising oil prices has also put pressure on the government to restrain spending in its 2026/27 budget due this week, expected around a narrower AUD25 billion deficit (0.8% of GDP). Elsewhere, trade developments are in focus as US President Trump and Chinese counterpart Xi Jinping are set to meet later this week.

The Australian dollar held around the $0.72 level after retreating in the previous session, as renewed Middle East tensions trimmed its weekly advance. The currency is headed for only a modest 0.3% weekly gain, as renewed clashes between the US and Iran weakened hopes for a near-term peace agreement, boosting demand for the safe-haven US dollar. The latest escalation followed US attempts to exit a conflict now in its third month, while awaiting Iran’s response to its proposal to reopen the Strait of Hormuz, a vital waterway for energy flows. The near-closure of the strait and the resulting energy price shock have fueled concerns about rising inflation, which could keep interest rates higher for longer. In Australia, markets are pricing around just a 20% chance of another rate hike in June by the Reserve Bank, after 75bps of tightening to 4.35% over the past three meetings. The probability rises to about 68% for August, with a terminal rate near 4.6% almost fully priced in by September.

The Australian dollar rose above $0.72, reaching a new four-year peak as growing expectations of a Middle East peace deal weakened the safe-haven US dollar, while disappointing domestic trade figures weighed on sentiment. Australia unexpectedly recorded a goods trade deficit of AUD 1.84 billion in March, its first in over eight years, as imports of data centre computing equipment surged, while fuel shipments also jumped on higher prices driven by the Iran conflict. Elsewhere, the greenback remained under pressure after reports that the US and Iran are moving toward formally ending the conflict, potentially reopening the Strait of Hormuz and paving the way for further nuclear talks. The Aussie also continued to benefit from a rate hike this week from the Reserve Bank of Australia, which lifted the cash rate to 4.35%. Markets now see only a 20% chance of another move in June after three rate hikes this year, while a further increase toward 4.60% by September remains fully priced.