• AUD/USD declines on Friday despite a recent rate hike from the Reserve Bank of Australia.
• The RBA raised its policy rate to 4.10% and maintains a hawkish stance on inflation.
• Renewed geopolitical tensions boost safe-haven demand for the US Dollar.

AUD/USD trades lower around 0.7040 on Friday at the time of writing, down 0.68% on the day, as the pair is pressured by a return of safe-haven demand despite supportive domestic factors in Australia.

The Australian Dollar (AUD) remains underpinned this week by the Reserve Bank of Australia (RBA) decision on Tuesday to raise its Official Cash Rate by 25 basis points to 4.10%, marking a second consecutive hike this year. Governor Michele Bullock stated that inflation remains too high and warned about potential second-round effects from rising energy costs amid tensions in the Middle East. Strong labor market data, with better-than-expected job growth and a steady Unemployment Rate in February, also reinforce the central bank’s view that the economy can withstand tighter monetary policy.

However, these supportive elements for the Aussie are being overshadowed by a broader risk-off environment on Friday. The escalation of the Middle East war is fueling concerns about a prolonged disruption affecting key energy infrastructure. In this context, investors are shifting towards safe-haven assets, notably the US Dollar (USD).

Analysts at Scotiabank highlight that the Greenback is regaining broad strength as markets reassess geopolitical risks and central bank trajectories. Rising Bond yields and persistent uncertainty are further supporting the US Dollar, weighing on cyclical currencies such as the AUD. According to the bank, current market dynamics resemble the early stages of the conflict, characterized by strong demand for the USD.

Meanwhile, the Federal Reserve (Fed) maintains a cautious stance, signaling only very gradual monetary easing. According to Nordea, markets now expect limited rate cuts over the medium term, which further enhances the relative appeal of the US Dollar in an environment of heightened global uncertainty.

Overall, despite solid domestic fundamentals and a more restrictive monetary policy in Australia, AUD/USD remains under pressure as geopolitical risks and safe-haven flows continue to dominate market sentiment.