After a surge in the Australian dollar above US71¢, currency strategists warn the rally is going to fizzle because the Reserve Bank of Australia has finished raising interest rates and there is weak demand for commodities from China.
The local currency has jumped more than 6 per cent against the US dollar this year, making it the second-best performer against the greenback behind the Norwegian krone.
On Tuesday, the Australian dollar traded at US71.10¢ after earlier climbing to its highest in 10 weeks at US71.29¢.
But while it has shot up by US2¢ in just seven weeks, foreign exchange strategists caution that much of the momentum was powered by a weaker US dollar from a dovish-sounding US Federal Reserve, rather than a stronger Australian economy.
“It is first and foremost a story about the US dollar slippage,” said Ray Attrill, head of foreign exchange strategy at National Australia Bank, who pointed to softer US economic data, including a cooler-than-expected inflation report and weak retail sales figures last week.
“Fears of a Fed rate hike as soon as September eased back to 33 per cent [probability] from 40 per cent, which is a reasonable size move over the course of a week or so.”
The US dollar index, which measures the greenback against a basket of six currencies, dropped to 99.29 on Monday, the lowest in 10 weeks.
But the greenback was already under pressure after new Fed chairman Kevin Warsh last month offered no clear guidance on future interest rate moves beyond a basic commitment to tackle inflation, leaving markets uncertain about the central bank’s next steps.
Some analysts warned against writing off the greenback just yet. They included Franklin Templeton chief investment officer Sonal Desai, who dismissed market talk of a long-term collapse in the US dollar.
“I don’t think there is a challenger [to the US dollar] and therefore there isn’t a de-dollarisation,” said Desai. She saw the recent weakness as normal exchange rate fluctuations rather than a structural decline.
Closer to home, higher interest rates provided short-term support for the Australian dollar.
While NAB expected both the Fed and the RBA to keep interest rates on hold for the rest of the year, Attrill noted Australia’s 4.35 per cent cash rate was the highest among the group of 10 major industrial countries.
“That is conducive to high-yielding currencies doing well from a carry trade perspective. [The recent strength] is not about an outstanding Australian story,” he said.
A carry trade is when investors borrow at low rates with currencies such as the yen to buy high-yielding assets such as the Aussie dollar.
However, currency bears said the broader economic fundamentals told a different story.
Source: https://www.afr.com/markets/currencies/the-aussie-dollar-peak-is-in-the-rearview-mirror-warn-analysts-20260817-p60owb