Australian Dollar drops on dovish RBA outlook, stronger US Dollar
AUD/USD remains subdued after registering over 1% losses the previous day, trading around 0.6910 during Asian hours on Friday.
The Australian Dollar experienced a decline on Friday due to expectations of less aggressive interest rate hikes from the Reserve Bank of Australia (RBA), while the US Dollar strengthened. The RBA had raised its cash rate by 25 basis points to 4.85% on November 3, but the split 6-3 decision, with three policymakers favoring no change and the removal of explicit language about future tightening, indicated a possible pause in December.
However, RBA Deputy Governor Andrew Hauser mentioned that inflationary pressures remain very high. The US Dollar gained support from market caution as investors awaited the upcoming US Nonfarm Payrolls report, which could influence market expectations for the Federal Reserve's December policy decision. Nevertheless, the US Dollar's support was tempered by factors such as declining US bond yields and the potential for diplomatic progress with Iran, keeping the safe-haven greenback on the back foot.
Additionally, Democrats' victory in the US midterm elections raised expectations of political gridlock, which could hinder government spending and result in slower economic growth. Analysts from OCBC believe that the overall macro backdrop still favors the US Dollar, with the Federal Reserve's continued tightening and a Democratic-controlled Senate strengthening policy continuity.
The US Dollar is the most heavily traded currency globally, accounting for over 88% of all foreign exchange turnover, and its value is primarily influenced by monetary policy decisions by the Federal Reserve, which have two objectives: controlling inflation and promoting full employment.
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