Australian Dollar Hits Two-Month Low as US Jobs Boost Fed Rate Hike Bets, June 08

The Australian dollar fell 1.2% to 70.18 US cents on June 08, marking its lowest level in two months. A strong US employment report showing 172,000 new jobs sparked trader bets on Federal Reserve rate hikes later this year. Middle East tensions and rising global interest rates compounded the weakness, making the Australian currency less attractive to investors seeking returns.

US Jobs Report Triggers Rate Hike Expectations

The US employment report released on June 07 showed nonfarm payrolls increased by 172,000 jobs, far exceeding estimates. This stronger-than-expected data prompted traders to raise bets on a Federal Reserve rate hike later this year. Markets now price in a more than 70% chance the Fed will raise rates in December, up sharply from 45% a week earlier.

Capital Economics chief markets economist Jonas Goltermann said the jobs report paints a picture of a strengthening US labour market despite ongoing energy price shocks. This combination makes policy tightening by the Fed increasingly probable, with expectations now for two 25-basis-point rate hikes later this year.

Why Higher US Rates Hurt the Australian Dollar

Rising US interest rates attract foreign investors seeking better returns, boosting demand for the US dollar at the expense of other currencies. The Australian dollar fell 1.76% against the US dollar over the past week, the worst performer among major currencies. At 4pm AEST on June 08, the Australian dollar was trading at 70.39 US cents after earlier hitting 70.18 US cents.

InTouch Capital Markets senior FX strategist Sean Callow noted that the US dollar is up versus all other major currencies. He attributed the move to higher US yields, a stronger US dollar, and accompanying equity market reversal. Wall Street’s technology-heavy NASDAQ index fell 4% on the jobs news.

Middle East Conflict and Global Rate Pressures

Renewed fighting in the Middle East added to currency market volatility. Iran launched ballistic missiles at Israel over the weekend in the most serious test of a fragile two-month ceasefire. This geopolitical risk raised concerns about inflation and higher interest rates globally.

AMP deputy chief economist Diana Mousina said Australia is no longer expected to be an outlier with rising interest rates. Markets are pricing in higher interest rates globally, which is keeping bond yields elevated. Global financial markets are getting nervous about higher inflation and rising interest rates as the Middle East conflict drags on.

Winners and Losers from Currency Moves

The weaker Australian dollar is positive for exporters as it makes their products and services more price-competitive overseas. However, it reduces purchasing power for Australian tourists heading abroad. The New Zealand dollar similarly fell to its lowest in two months at $0.5779 USD, while the euro dropped to a two-month low of $1.1507 USD and sterling hit a three-week trough of $1.33165 USD.

Final Thoughts

The Australian dollar’s 1.2% fall to a two-month low reflects rising US interest rates and global risk aversion. For Australian investors, weaker currency benefits exporters but hurts overseas purchasing power and equity valuations denominated in foreign currency.

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