Australian Dollar falls as stronger US Dollar and dovish RBA outlook weigh

4.85% is the RBA’s new interest rate. A divided vote, however, points to a possible pause in December.
Despite persistently high Australian inflation, the currency remains under pressure from the central bank’s less hawkish guidance.
Market caution supports the US Dollar, but lower bond yields and political gridlock cap its upside.

AUD/USD trades near 0.6910 in Friday’s Asian session. The pair remains subdued after losing over 1% the previous day. Less hawkish guidance from the Reserve Bank of Australia tempered expectations of additional interest rate increases, pushing the Australian Dollar lower against the US Dollar (USD).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A December pause appeared possible after the Reserve Bank of Australia lifted its cash rate by 25 basis points to 4.85% on 3 November. The decision passed by 6–3, with three policymakers preferring unchanged rates, while explicit guidance on further tightening was dropped. Even so, speaking at the Australian National University in Canberra on Thursday, RBA Deputy Governor Andrew Hauser indicated that inflationary pressures were still very high.

Ahead of the forthcoming US Nonfarm Payrolls report, broad investor caution provided support for the US Dollar. The release is expected to be pivotal in setting market expectations for the Federal Reserve’s December policy decision.

Several headwinds nevertheless offset that support. Lower US bond yields and continued hopes of diplomatic progress with Iran have kept the safe-haven currency under pressure. In addition, the Democrats’ victory has fuelled expectations of political gridlock in Washington. This could restrict government spending and, ultimately, slow economic growth.

USD support expected to persist on Fed tightening and institutional safeguards

The wider macroeconomic environment still favours the Dollar, according to OCBC strategists: “with US growth still solid, inflation sticky and the Fed on track for further tightening, we retain our view that the USD should remain supported, albeit with greater two-way risks.” In their assessment, a Democratic Senate “should also strengthen the institutional guardrails around Fed independence by making it harder for the administration to confirm additional allies to the Federal Reserve Board,” bolstering their view that continuity in Fed policy will support the currency despite increasing market volatility surrounding the outlook.

US Dollar: frequently asked questions

US Dollar: what role does it play?

Over 88% of global foreign exchange turnover involves the US Dollar (USD). Data from 2022 put its average daily transaction value at $6.6 trillion, making it the world’s most actively traded currency. As well as being the official currency of the United States of America, it serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside local banknotes. After the Second World War, the USD replaced the British Pound as the world’s reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

Federal Reserve policy: how does it affect the US Dollar?

Monetary policy is the single biggest influence on the US Dollar’s value. The Federal Reserve (Fed) sets that policy under a dual mandate: maintaining price stability by controlling inflation and promoting full employment. Interest rate adjustments are its main tool for meeting both objectives. With inflation above its 2% target and prices climbing too rapidly, the Fed will increase rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt rate cuts, putting downward pressure on the Greenback.

Quantitative Easing: what does it mean for the US Dollar?

In exceptional circumstances, the Federal Reserve can create additional Dollars through quantitative easing (QE). This process substantially expands the flow of credit through a stalled financial system. QE is an unconventional policy deployed when credit dries up as banks, fearing counterparty defaults, refuse to lend to one another. It is a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to tackle the credit crunch. Under this approach, it prints additional Dollars to purchase US government bonds, mainly from financial institutions. The result is usually a weaker US Dollar.

Quantitative Tightening: what does it mean for the US Dollar?

Usually supportive of the US Dollar, quantitative tightening (QT) reverses the QE process. The Federal Reserve ceases purchasing bonds from financial institutions and allows its existing holdings to mature without reinvesting the principal in new bond purchases.