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Australian Dollar drops on dovish RBA outlook, stronger US Dollar
- The RBA raised interest rates to 4.85%, but a split vote signals a potential December pause.
- High Australian inflation persists, but less hawkish central bank guidance continues to weigh on the currency.
- US Dollar gains support from market caution, though falling bond yields and political gridlock limit upside.
AUD/USD remains subdued after registering over 1% losses the previous day, trading around 0.6910 during Asian hours on Friday. The Australian Dollar lost ground against the US Dollar (USD) as expectations for further interest rate hikes were dampened by less hawkish guidance from the Reserve Bank of Australia.
Although Australia’s central bank raised its cash rate by 25 basis points to 4.85% on November 3, the split 6–3 decision, with three policymakers favoring no change, along with the removal of explicit language regarding future tightening, pointed to a possible pause in December. Nevertheless, RBA Deputy Governor Andrew Hauser signaled at the Australian National University in Canberra on Thursday that inflationary pressures remain very high.
Meanwhile, the US Dollar found support in widespread market caution as investors await the upcoming US Nonfarm Payrolls report, which is expected to play a critical role in shaping market expectations for the Federal Reserve's December policy decision.
However, that dollar support was counterbalanced by several opposing factors. Recent declines in US bond yields and lingering hopes for diplomatic progress with Iran continue to keep the safe-haven greenback on the back foot. Furthermore, the Democrats' victory has raised expectations of political gridlock in Washington, which could constrain government spending and ultimately lead to slower economic growth.
USD support seen holding as Fed tightening and institutional guardrails remain in focus
Strategists at OCBC argue that the broader macro backdrop continues to favour the Dollar, noting that “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.” They add that 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,” reinforcing their view that policy continuity at the Fed will underpin the currency even as market volatility around the outlook increases.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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