Australian dollar near highs on greenback, euro amid rate talk

The Australian dollar recently reached multi-month highs against the US greenback and euro, reflecting an increased expectation of further interest rate hikes by the Reserve Bank of Australia. Assistant Governor Sarah Hunter has highlighted the board's limited patience for rising inflation, and a potential fourth rate increase this year.

Market expectations now place a 68% probability on a 25 basis point rate hike to 4.60% during the September 29 policy meeting, up from just 10% a month ago. There's also a 60% chance rates may reach 4.85% next year.

Economist Luci Ellis of Westpac notes that the probability of an additional rate hike has risen significantly enough to make a November move the new base case. The shift is attributed to a more robust household sector and additional stimulus from the data centre boom. The hawkish stance has pushed 10-year bond yields to near their highest level since mid-2011 at 5.195%, widening the spread over Treasuries to its widest in three months at 43 basis points.

The Australian dollar is currently trading at $0.7217, near its four-month peak of $0.7225 overnight. The next major targets are the May peak at $0.7277 and a mid-2022 high of $0.7285, with a break potentially paving the way for $0.7500.

The Australian dollar also gained strength against the euro, which dropped to a near two-year low of A$1.6085. However, it faced a 1% decline on a stronger yen, settling at 111.22 yen overnight. The New Zealand dollar saw a slight drop to $0.5858, after experiencing sizeable selling against the Australian dollar due to recent market adjustments to the likelihood of further tightening by New Zealand's Reserve Bank.