The Australian Dollar (AUD) has experienced a continued decline for the second consecutive day against the US Dollar (USD) as of Tuesday. This ongoing depreciation is largely attributed to tariff threats made by US President Donald Trump. Meanwhile, the US Dollar Index (DXY) has seen a rise, reaching near 107.80 at the time of writing. These developments occur just before the Federal Reserve's monetary policy meeting scheduled for January 28 and 29, where traders anticipate that the Fed will maintain its benchmark overnight rate within the range of 4.25%-4.50%.
The Australian Dollar's weakness against the US Dollar underscores the impact of international political tensions on currency markets. President Trump's remarks on tariffs have placed pressure on the AUD/USD pair, which has struggled to gain stability. The anticipation of the Federal Reserve keeping interest rates steady adds further complexity to the current currency dynamics.
"We will have a lot of people bidding on TikTok." – Donald Trump
The Reserve Bank of Australia (RBA) plays a pivotal role in influencing the value of the Australian Dollar by setting the interest rates at which Australian banks lend to each other. These rates are crucial for maintaining a stable inflation rate between 2-3% through necessary adjustments. Meanwhile, fluctuations in the price of Iron Ore, one of Australia's largest exports, also significantly affect the AUD. An increase in Iron Ore prices generally boosts the Australian Dollar due to heightened demand for the currency.
Iron Ore is a vital component of Australia's trade balance, representing a substantial portion of the country's exports, with China being its primary destination. In 2021, Iron Ore accounted for $118 billion in export revenue for Australia. The trade balance, which measures the difference between what a country earns from its exports versus what it pays for imports, is another determinant of the Australian Dollar's value.
Apart from these economic indicators, recent data on Purchasing Managers' Indexes (PMI) presents a mixed picture. The Manufacturing PMI rose to 50.1 in January, surpassing both the previous reading of 49.4 and the forecast of 49.6. However, the Services PMI fell to 52.8 in January from 56.8 in December, missing the expected figure of 56.5. In comparison, the US Composite PMI showed a decline from 55.4 in December to 52.4 in January.
In an environment where oil prices are decreasing, President Trump's call for immediate interest rate cuts resonates globally.
"With oil prices going down, I'll demand that interest rates drop immediately, and likewise they should be dropping all over the world," – Donald Trump
While other major currencies have also faced challenges against the US Dollar, the Australian Dollar has emerged as particularly vulnerable amidst these geopolitical and economic factors.