Aussie dollar plunges to two-month low
The Australian dollar has fallen to a two-month low after the Middle East conflict flared up over the weekend, which followed unexpectedly strong US employment figures late last week.
The Aussie dollar has been trading at about 70.5 US cents, nearly two per cent down over the last week after fresh strikes from both Iran and Israel over the long weekend showed the conflict was not as close to a resolution as previously believed.
After months of gains, an unwelcome handbrake has been applied to the Aussie dollar. Getty
This is the lowest it has been since early April.
The biggest factor in the change came late last week, when employment data from the United States was stronger than expected.
That has raised the likelihood of higher interest rates in the US, potentially matching the hikes handed down by the RBA that have driven the Australian dollar’s gains this year.
The escalation in the Middle East conflict and its impact on oil prices and the chance of a permanent end to the conflict also played a role, economists said, proved by changes in the market when US President Donald Trump called for calm.
The Aussie rose slightly after Trump urged Israel not to retaliate.
Commonwealth Bank expects the Australian dollar to rise back towards its 50-day average if a deal to reopen the Strait of Hormuz is reached, but warned “the boost is likely to be modest because such a deal has been flagged for some time.”
“Conversely, a renewed escalation in the conflict will weigh materially on the risk-sensitive AUD/USD,” a report by the bank released this morning said.
Analysis by CBA shows the Australian dollar will also rise against other currencies if a deal to reopen the key waterway is reached.
The RBA will hand down its next cash rate decision a week from now, although is widely expected to keep rates on hold, even though a weaker local currency can increase domestic inflationary pressures.
However, economists and traders are forecasting at least one more hike before the end of the year.
The RBA has consistently said if inflation remains high, it will have little choice but to avoid cutting interest rates.
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