Australian Dollar Hits Fresh 3-Month Low

The Australian dollar depreciated further below $0.690, hitting a fresh three-month low as renewed tensions in the Middle East weighed on risk sentiment. The US and Iran agreed to pause hostilities and resume peace talks over the Strait of Hormuz dispute after days of strikes and counterstrikes on vessels in the Gulf last week. Oil prices climbed, reigniting inflation concerns, while the safe-haven US dollar remained firm, with expectations of interest rate hikes by the Federal Reserve adding to its strength. Meanwhile, the Reserve Bank of Australia on Monday outlined the tools it could deploy during future economic or financial crises, highlighting bond purchases, forward guidance, and liquidity measures should borrowing costs return to very low levels. Attention now turns on Tuesday's release of minutes from the central bank's most recent interest-rate setting meeting. The RBA left the cash rate unchanged at 4.35% at its June meeting following three rate hikes earlier this year.

The Australian dollar traded below $0.690, near a three-month low and headed for a heavy weekly loss as the greenback remained broadly firm on expectations of US interest rate hikes. The US dollar has rallied since the Federal Reserve adopted a surprisingly hawkish stance last week, prompting markets to price in a 75% chance of a rate hike as early as September. Meanwhile, expectations for additional tightening by the Reserve Bank of Australia have eased, despite a slight increase in underlying price pressures in May. Investors expect second-quarter inflation to fall short of the central bank’s 8% forecast, reinforcing bets that the tightening cycle already reached its peak. Markets imply only a 50% chance of another hike in the 4.35% cash rate, while some have started pricing in rate cuts in the second half of 2027. The Aussie is also poised for a second straight monthly loss of over 4%, as Middle East tensions and a selloff in tech stocks earlier this month weighed on risk assets.

The Australian dollar fell further below $0.690, approaching a three-month low as broad US dollar strength outweighed a rebound in domestic employment data. Australia's economy added 40,300 jobs in May, rebounding from a revised decline of 40,600 in April and exceeding market forecasts for a 30,000 increase, while the unemployment rate edged down to 4.4% from 4.5%, as expected. The latest labor market report comes on top of Wednesday's mixed consumer inflation figures, which have left markets divided on another interest rate hike, priced in at 50% likely by year’s end rather than at the August meeting. RBA Deputy Governor Andrew Hauser said on Wednesday that the central bank still has more work to do to bring inflation back to its 2-3% target, indicating that further policy tightening may be needed as underlying price pressures remain elevated. Meanwhile, the US dollar remained broadly stronger as investors continued to price in Federal Reserve interest rate hikes later this year.