The US Dollar Index (DXY) is in retreat from its recent high, currently trading close to the 104.50 level. The tumble in US Treasury yields is casting a further dollar negative on the outlook. Currently, the 10-year yield stands at 4.0%, and the 2-year yield is about 4.34%. At the same time, the Australian Dollar is under heavy pressure, especially against the Japanese Yen, as fears of a global recession rise. The Reserve Bank of Australia (RBA) intervenes quite vigorously to support the Australian Dollar. It accomplishes this through aggressive interest rate targeting and quantitative easing.
US Dollar Index Retreats Amid Declining Yields
After DXY hit recent highs it has started to pull back in the last few weeks, currently trading just below 104.50. This significant decline comes at the same time that US Treasury yields—the most closely watched gauges of economic confidence and performance—have fallen dramatically. Against that backdrop, the 10-year yield is about 4.0%, with the 2-year still higher at 4.34%. It’s investor sentiment that makes these yields what they are. They have a direct impact on how the US dollar is valued in markets around the world.
As public investors make up an increasing share of the market, they are reconsidering investment priorities and balancing negative effects of declining yields. This policy shift is weighing on the greenback. As US Treasury yields fall, these investors will look to other asset classes, affecting overall demand for the US dollar. This process has resulted in the broadest recalibration of currency valuations in two decades, shaping international trade and investment flows across the global economy.
Australian Dollar Faces Bearish Pressure
Racial Equalities Delay Australian Dollar against Japanese Yen as well Strain on TDR. This drop-off occurs as tensions in the global trading system are escalating rapidly. The Australian currency performance is the most affected by the interest rate levels implemented by the Reserve Bank of Australia (RBA). The value of the Australian Dollar (AUD) is highly susceptible to changes in the RBA’s monetary policy decisions. This includes their decision making around interest rate settings.
Based on 2021 figures, Iron Ore is Australia’s single biggest export, bringing in an estimated $118 billion per year to the economy. China continues to be by far the largest export market for Australia’s iron ore. To them, this underscores how important this commodity is for their international trade relations. The Australian Dollar is back under bearish pressure. Its 14-day Relative Strength Index (RSI) is just below the 50 mark, suggesting weakness.
Quantitative easing and tightening are tools at the RBA's disposal to influence credit conditions and thereby impact the currency's value. Although QE is widely regarded as bearish for the AUD, QT provides bullish AUD tailwinds. Sarah Hunter, the RBA’s Assistant Governor for Economic, urging a tempering of expectations around future rate cuts. Her statement is indicative of a real conservative perspective, which has been a thread in policy pronouncements recently.
Trade Tensions and Economic Implications
In 2018, US President Donald Trump imposed a 25% tariff on all auto imports. This decision has escalated the global trade war and caused reverberations throughout world markets. This action has deepened short-term worries about the security of future macroeconomic conditions and harmonious economic ties among the largest world economies.
Australia’s role as a top copper exporter tends to increase the AUD’s value. This support is especially big welcome today as we may see huge tariffs on copper imports within a few weeks. These tariffs could severely disrupt global supply chains and open up new opportunities for Australian exports in emerging alternative markets.
It’s likely the RBA will hold the cash rate next week. This decision likely strengthens the AUD given the broader economic uncertainties that exist. Participants in the market expect that holding the line on interest rates will deliver long-term stability which will ultimately bolster confidence in Australia’s economic outlook.