Australian Dollar drops due to Middle East unrest, US Dollar gains, China CPI eyed

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AUD/USD weakens on increased risk aversion amid escalating tensions in the Middle East.
Mojtaba Khamenei was appointed Iran’s supreme leader after his father was killed in US-Israeli strikes, signaling continued hardline rule.
US Dollar Index rises toward three-month high as WTI Oil price surges above $100 per barrel.

AUD/USD begins the week on a weaker note, trading around 0.6960 during the Asian hours on Monday. The pair weakens as the US Dollar (USD) gains on safe-haven demand amid escalating tensions in the Middle East. Later in the day, markets will focus on China’s February Consumer Price Index (CPI) data, which could influence the Australian Dollar (AUD) due to Australia’s close trade ties with China.

The Iran war has entered its second week with no clear resolution in sight. Mojtaba Khamenei was named Iran’s new supreme leader just over a week after his father, Ayatollah Ali Khamenei, was killed in US-Israeli strikes, signaling that hardliners remain firmly in control of the country. Last week, US President Donald Trump said the appointment would be “unacceptable” and suggested that Washington should have a role in selecting Iran’s next supreme leader.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, rises to near three-month highs and is trading around 99.60 at the time of writing. The Greenback also draws support as West Texas Intermediate (WTI) crude Oil prices surge above $100.00 per barrel, fueled by concerns that a prolonged Middle East conflict could disrupt global energy supplies over the longer term. Meanwhile, US President Donald Trump said the increase in oil prices is a “very small price to pay” for defeating Iran and ensuring global peace.

Moreover, the US Dollar receives additional support as traders revise inflation expectations following the outbreak of hostilities last week, strengthening bets that the Federal Reserve (Fed) could delay interest rate cuts.

Meanwhile, debate over a potential rate hike by the Reserve Bank of Australia (RBA) persists, as markets assess the impact of higher energy costs and rising global uncertainty on inflation and economic growth. However, the ASX 30-Day Interbank Cash Rate Futures contract for March 2026 was trading at 96.125 on March 6, implying a 22% probability of a rate increase to 4.10% at the RBA’s next Board meeting in March.

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.