Australian Dollar declines as risk-off sentiment lifts US Dollar

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AUD/USD pulls back from 46-month high of 0.7227, reached on May 1, trading around 0.7200 during the European hours on Monday. The pair weakens as the US Dollar (USD) gains on safe-haven demand after Iran’s armed forces warned of a harsh response if the United States (US) enters the Strait of Hormuz.

AUD/USD weakens as the US Dollar gains on safe-haven demand after Iran warns of a harsh response in Hormuz tensions.
Iran warns it will “respond harshly” and cautions the US against entering the Strait of Hormuz.
ASX May 2026 cash rate futures at 95.745 imply a 74% chance of a rate hike to 4.35% on Tuesday.

Iranian army also said all commercial ships and oil tankers must refrain from movement through the Strait of Hormuz without coordination with the Iranian military. President Donald Trump said on Sunday that the United States will begin guiding neutral ships stranded in the Persian Gulf out through the Strait of Hormuz starting Monday. The initiative is aimed at helping civilian vessels from non-aligned countries exit the contested waterway and resume normal operations.

The Australian Dollar (AUD) may regain its ground as market participants expect the Reserve Bank of Australia (RBA) to deliver an interest rate hike on Tuesday. As of May 1, the ASX 30 Day Interbank Cash Rate Futures May 2026 contract was trading at 95.745, implying a 74% probability of a rate hike to 4.35%.

The main catalyst is a sharp rise in Australia’s headline inflation in March, driven by global energy shocks and tensions in the Middle East. Australia’s headline Consumer Price Index (CPI) increased to 4.6% year-over-year (YoY) in March. Although slightly below the 4.7% forecast, the reading remains well above the central bank’s target range.

Australia’s TD-MI Inflation Gauge advanced 0.6% month-over-month (MoM) in April, easing from a record 1.3% surge in the previous month but marking a second consecutive monthly rise. Meanwhile, ANZ Job Advertisements declined 0.8% MoM, moderating from March’s 3.2% drop, the steepest fall in six months, while extending a second straight contraction.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

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