Aussie Extends Decline to Near 2-Week Low

The Australian dollar fell to around $0.71, extending its decline from the previous week to reach a nearly two-week low as hotter-than-expected US inflation data strengthened the case for a Federal Reserve rate hike. After the data release, traders ramped up wagers to 86% that the US Federal Reserve will raise rates at its meeting next week, while also pricing in another hike later in the year, boosting the US dollar. In Australia, hawkish comments from the Reserve Bank, along with rising oil prices, have pushed markets to price in a 90% chance of a rate hike later this month. RBA Assistant Governor Sarah Hunter said last week that the central bank may need to raise rates again if inflation proves more persistent than expected. Meanwhile, Brent crude continued to rise above $100 a barrel after new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf compounded supply concerns following the closure of a key Saudi oil pipeline.

The Australian dollar held its recent decline below $0.72, staying near its lowest in more than a week and on track for a weekly loss as the US dollar strengthened alongside a sharp rise in Treasury yields. The greenback gained after US producer inflation came in stronger, reinforcing expectations that the Fed could raise rates next week. A sharp rise in Treasury yields also underpinned the dollar following lower-than-expected purchases by the US Treasury Department during its first expanded buyback operation. Meanwhile, oil prices continued to rise above $100 per barrel amid the escalating Middle East tensions, raising inflation risks and expectations that central banks may keep policy tighter for longer. Markets ramped up bets on a fourth rate hike this year by the Reserve Bank of Australia, with swaps now implying an 84% chance of a 25-bp increase at the upcoming meeting this month. Markets also expect the cash rate to reach 4.85% by early next year, its highest level since 2008.

The Australian dollar steadied around $0.72, halting its rally near its highest level since mid-May as escalating Middle East tensions weighed on global risk sentiment, though hawkish RBA signals reinforced expectations for a near-term rate hike. Iran and the US struck tankers in the biggest wave of attacks on shipping since the war began, threatening to worsen the disruption of energy supplies from the Gulf. This pushed oil prices above $100 per barrel, intensifying inflationary pressures that have already started feeding into domestic consumer prices, which has increased expectations of a fourth interest rate hike this year. Deputy Governor Hauser said the debate at the next meeting would focus on whether to raise interest rates, citing persistently high inflation and upside risks. Markets now price in a 77% chance of a quarter-point hike at the RBA’s upcoming meeting this month, while traders are also implying an 80% probability that the cash rate will reach 4.85% next year.