Australian Dollar Under Pressure As Yield Advantage Over US Shrinks
The Australian dollar is facing renewed pressure as its yield advantage over US assets narrows and investors grow increasingly wary of escalating tensions in the Middle East, sparking fears of deeper losses for the currency.
Bloomberg reported that the Aussie has fallen 0.7% this week to around 71 US cents, making it the weakest performer among Group-of-10 currencies and putting it on track for a second straight weekly decline. Analysts at AT Global Markets warned the currency could slide below the 70 US cent level in the near term.
The decline comes amid a global bond selloff driven by concerns that central banks may need to keep interest rates higher for longer to contain inflationary pressures fuelled by rising oil prices.
Although Australian government bonds have joined the broader rout, the yield gap between Australian debt and US Treasuries has narrowed to its smallest level since November, eroding one of the key supports for the Australian dollar.
Nick Twidale said the Aussie has lost part of its yield appeal and could face steeper losses if the yield differential with the US remains compressed.
“To a certain extent, the Aussie has lost its yield support and could take a harder hit than some of the other majors if the yield differential remains tighter in the next couple of days,” he said.
Twidale added that the threat of renewed hostilities in the Gulf could intensify pressure on the currency as investors seek safer assets.
The weakening yield support also threatens to reverse the Australian dollar’s more than 6% rally this year, which had been driven by the Reserve Bank of Australia raising interest rates to their highest level since December 2024 in a bid to tame inflation.
However, policymakers have since signalled a likely pause in rate hikes, while traders have increased bets that peers including the Federal Reserve may resume tightening.
Carol Kong said the narrowing Australia-US interest rate differential is likely to continue weighing on the currency.
“Aussie dollar can test support at 70.64 cents over the next 24 hours,” she said, particularly if minutes from the Federal Reserve’s latest meeting strike a hawkish tone.
