The Australian Dollar is under pressure as US President Donald Trump's administration considers imposing a 10% tariff on Chinese imports, beginning February 1. This announcement comes amidst a backdrop of economic factors that influence the strength of the Australian Dollar, including domestic inflation rates, the price of Iron Ore, and the health of the Chinese economy—Australia's largest trading partner.
The Reserve Bank of Australia (RBA) plays a crucial role in influencing the Australian Dollar by setting interest rates at which banks lend to one another. With a primary goal of maintaining a stable inflation rate between 2-3%, the RBA's decisions significantly impact the currency's value. In addition to interest rates, the RBA can also employ quantitative easing or tightening to adjust credit conditions, with easing typically weakening the Australian Dollar and tightening strengthening it.
Iron Ore, Australia's largest export, is a critical driver of the Australian Dollar. In 2021, Iron Ore exports accounted for $118 billion annually, primarily destined for China. Changes in Iron Ore prices directly affect the currency's strength; a rise in prices generally strengthens the Australian Dollar, while a fall can lead to its weakening. The health of China's economy further influences this dynamic, as it is a major consumer of Australian Iron Ore.
Inflation within Australia itself is another key factor impacting the currency. As inflationary pressures fluctuate, they can alter economic forecasts and monetary policy decisions, thereby affecting the Australian Dollar. The country's economic growth rate and trade balance also play significant roles in determining its currency's strength.
In recent developments, the US Consumer Price Index increased by 2.9% year-over-year in December, up from 2.7% in November. This aligns with market expectations and has implications for global markets, including Australia. Additionally, President Trump's tariff threats, along with bets on Federal Reserve rate cuts and a weaker US Dollar, support prospects for an extension of the XAU/USD’s over-one-month-old uptrend.
President Trump's consideration of tariffs on Chinese imports has added pressure on the AUD/USD pair. This geopolitical tension exacerbates existing economic challenges for Australia.
"If we make a TikTok deal and China doesn’t approve it, we could maybe put tariffs on China." – Donald Trump
Australia's trade balance is yet another factor influencing the Australian Dollar. A positive trade balance can bolster the currency's strength by indicating healthy export levels relative to imports. However, potential tariffs from the US could disrupt this balance by impacting trade relations with China.