A fresh inflation warning from top officials at the Reserve Bank of Australia has pushed the dollar to a four-month high against the greenback, despite an escalation of violence in the Middle East that would typically weigh on the currency.
The Australian dollar rose to US72.33¢ on Wednesday, its highest level since mid-May, while against the euro, the local currency hit 62.16¢, hovering near levels it has not traded at since 2024. Against the Kiwi, it is near a 13-year high of $NZ1.23.
NAB’s head of FX strategy Ray Attrill said hawkish comments from the RBA chief economist and assistant governor Sarah Hunter at The Australian Financial Review Property Summit on Tuesday was the key catalyst behind the currency’s leg higher this week.
“Around 98 to 99 per cent of her concerns [about the economy] seemed to be about inflation rather than housing,” said Attrill.
“The market took note of that, so we saw a lift in market expectations for a September rate hike.”
Hunter’s comments were swiftly followed up by RBA deputy governor Andrew Hauser, who told ABC’s 7.30 program on Tuesday evening that he was concerned that recent data showed inflation and economic growth in Australia had come in stronger than expected in recent months.
“Inflation is too high, and that’s why we raised interest rates three times at the beginning of this year. And the question now, frankly, for us, is have we done enough or is more needed,” said Hauser.
Money markets are pricing in a 73 per cent chance of the RBA board raising the cash rate to 4.6 per cent at its next meeting on September 28-29 and is fully priced for a rate increase by the end of the year.
Before the RBA remarks, bond traders had priced in a 69 per cent chance of a September rate rise. Just two months ago, most economists believed the RBA had won the inflation battle and was done with raising rates.
On Wednesday, the rate-sensitive three-year government bond yield climbed to 4.86 per cent, the highest since late March.
Hawkish pivot
Attrill said the Aussie, which was a proxy for risk sentiment, would have climbed even higher against the US dollar had the war between the United States and Iran not escalated overnight.
Brent crude oil jumped back above $US99 a barrel after the US launched a fresh wave of strikes on Iranian oil tankers in the Strait of Hormuz and Houthi militants hit Saudi Arabian oil facilities.
“Brent crude nudging up against the $US100 barrier brought the US equity market to heel during the afternoon during the close, when reports of the conflict were at their most prominent,” said Attrill.
“It’s still the case that the Aussie is the currency to suffer during significant risk-off periods.”
The renewed threat to global oil supplies has triggered a spike in bond yields around the world and pushed the all-important 10-year bond yield to multi-decade highs from the US to the UK.
While the RBA led the developed world in raising interest rates aggressively at the start of the year to combat an unexpected pick-up in inflation, the higher oil price is another complication that is pushing other central banks to finally follow suit.
The European Central Bank is expected to raise interest rates for a second time this year on Thursday, while New Zealand boosted its cash rate last week.
But because the RBA’s cash rate is the highest among developed countries, it has made Australian bonds more attractive to foreign investors. This supports the local currency when they buy the assets.
ANZ’s head of FX, Mahjabeen Zaman, said how much further the Australian dollar would climb against the greenback depended largely on key US inflation data due at the end of the week.
Bond traders are pricing in about a 60 per cent chance of a rate rise by the US Federal Reserve in September, a move that would send the US dollar higher.
But Zaman noted that several Fed governors have signalled a preference to keep rates on hold should the inflation data come in soft.
“That could see markets reprice Fed expectations and alter the AUD/USD trajectory,” she said.
Source: https://www.afr.com/markets/currencies/a-hawkish-rba-pushes-aussie-dollar-to-four-month-high-20260909-p60voq