The Australian and New Zealand dollars both climbed to 10-week highs on Tuesday, as traders increasingly bet that the US Federal Reserve will hold interest rates steady at its next meeting. That shift in expectations has weighed on the US dollar, giving a lift to currencies across the Asia-Pacific region.
The move extends a recent trend: similar dynamics have already boosted other currencies, as seen in the yen's gains on scaled-back Fed hike bets and the euro and pound hitting multi-month highs after weak US retail sales. Now the spotlight turns to Australia, where Thursday's jobs report could determine whether the Aussie can push through the 0.72 level against the US dollar.
Why the Fed matters for the Aussie and Kiwi
The US dollar is the world's primary reserve currency, and its value tends to move inversely with other currencies. When traders expect the Fed to raise rates, US yields typically rise, making dollar-denominated assets more attractive and pulling money into the greenback. That tends to weaken currencies like the Australian and New Zealand dollars.
But with markets now leaning toward a Fed hold next month, that pressure has eased. The result: the Aussie and Kiwi have been able to rally, joining a broader trend of dollar weakness that has also supported Asian stocks and other risk assets.
For everyday investors, the Fed's policy path is a key driver of global markets. When the Fed holds rates, borrowing costs stay lower for longer, which can support economic growth and riskier investments. But it also means the dollar may not offer the same yield advantage it did during the hiking cycle.
Australia's jobs report: the next catalyst
Traders are now focused on Australia's employment data, due out Thursday. The report will show whether the country's labour market remains resilient, which could influence the Reserve Bank of Australia's (RBA) own policy decisions.
A strong jobs number would suggest the Australian economy can handle higher rates, potentially giving the RBA room to keep policy tight. That could push the Aussie higher, possibly testing the 0.72 level. Conversely, a weak report could raise expectations of RBA rate cuts, which would likely weigh on the currency.
It's important to note that currency markets are notoriously difficult to predict, and a single data point rarely dictates a long-term trend. But for traders, Thursday's report is a clear near-term catalyst.
What it means for investors
For everyday investors, currency moves matter in a few ways. If you hold international investments, a stronger Aussie or Kiwi means your overseas returns are worth more when converted back to local currency. Conversely, if you're planning a trip abroad, a stronger domestic currency makes travel cheaper.
For those with exposure to Australian or New Zealand assets, the currency's strength can also affect the competitiveness of exporters. A higher Aussie makes Australian goods more expensive overseas, which can pressure export-oriented companies. On the flip side, it lowers the cost of imported goods, which can help contain inflation.
The broader context is also worth noting. The Fed's next move is still uncertain, and even gold has pulled back as profit-taking meets cooler Fed bets. That suggests the market is still digesting the implications of a potential pause.
For now, the key takeaway is that the Fed's policy path remains the dominant force in global currency markets. Thursday's Australian jobs report will provide the next clue, but investors should be prepared for volatility either way.
As always, it's wise to focus on your long-term investment goals rather than trying to time short-term currency moves. Diversification across currencies and asset classes can help smooth out the bumps.
