Australian Dollar extends gains as US Dollar struggles on tariff uncertainty

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AUD/USD extends its gains for the third successive session, trading around 0.7100 during the Asian hours on Monday. The pair strengthens as the US Dollar (USD) weakens against its major counterparts amid persistent tariff uncertainty.

AUD/USD rises as trade uncertainty persists after Donald Trump criticized the Supreme Court over blocked reciprocal tariffs.
Trump said that he will raise tariffs to 15% from 10% after the Court struck down his trade agenda.
The Australian Dollar gains on rising hawkish expectations around the Reserve Bank of Australia’s policy outlook.

Uncertainty over trade policy remains elevated after US President Donald Trump criticized the Supreme Court for blocking his use of emergency powers to implement so-called reciprocal tariffs. According to CNBC, Trump said on Saturday that he plans to raise global tariffs to 15% from 10%. His comments followed the Court’s decision to strike down a significant portion of his trade agenda. Trump added that the new tariffs would be “effective immediately” and cautioned that further levies could be introduced.

However, gains in AUD/USD may be capped as risk aversion intensifies amid ongoing US-Iran tensions. The New York Times reported on Sunday that Trump is weighing limited airstrikes on Iran. He indicated that if diplomatic efforts or an initial targeted US strike fail to persuade Iran to abandon its nuclear program, a broader attack could be considered in the coming months. The next round of US-Iran talks is scheduled for Thursday in Geneva, though Washington is reportedly assessing alternative actions should negotiations collapse.

Meanwhile, the Australian Dollar (AUD) finds support from growing hawkish expectations surrounding the Reserve Bank of Australia policy outlook. Firmer domestic data and stronger guidance from policymakers have reinforced expectations that the RBA may maintain a tightening bias to address persistent inflationary pressures.

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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