A wave of risk aversion swept global currency markets as escalating geopolitical tensions in the Middle East and persistent expectations for a hawkish US Federal Reserve drove the US Dollar (USD) higher against major currencies. The Australian Dollar (AUD) extended its decline against the USD, dropping to the 0.7150 area, following softer-than-expected Australian GDP growth of 0.3% in the first quarter compared to 0.8% in the prior quarter. This weakness was compounded by a slowdown in Australia's annual inflation rate and a rise in the unemployment rate to the highest level in about four-and-a-half years, reducing the likelihood of a Reserve Bank of Australia rate hike in June [1].
Geopolitical developments further fueled safe-haven demand for the USD. The US military's Central Command (CENTCOM) confirmed conducting 'self-defence' strikes on Iran's Qeshm Island after Iran launched missiles and drones at US military facilities in Kuwait and Bahrain. Most of these attacks were intercepted by US and Gulf air defense systems. The collapse of US-Iran peace negotiations and intensified fighting between Israel and Hezbollah heightened concerns, with sources warning of the potential for a prolonged closure of the Strait of Hormuz, which could disrupt global energy markets and reignite inflationary pressures [1][2].
The Indonesian Rupiah (IDR) hit a fresh record low near 18,037 against the USD, as the Greenback's strength was amplified by risk-off sentiment and a narrowing Indonesian trade surplus, which fell to its lowest level since 2020. Despite government interventions, including tighter revenue retention rules for exporters and the launch of a new state-owned commodity trading firm, the IDR remained under pressure due to reduced dollar inflows from exports [2].
In North America, the USD/CAD pair held firm near 1.3850, with the bullish USD countering rising oil prices, which typically support the Canadian Dollar (CAD). Technical indicators showed a constructive bullish bias for USD/CAD, with the Relative Strength Index near 65 and the MACD in positive territory. However, gains were capped by resistance at the 1.3876 level, while support was noted at 1.3806 and below [3].
Market participants are closely watching upcoming US economic data, including the ADP private-sector employment report, ISM Services PMI, and the closely-watched Nonfarm Payrolls (NFP) report on Friday, for further clues on the Fed's policy trajectory. According to the CME Group's FedWatch Tool, traders assign over a 50% probability of a 25 basis point Fed rate hike at the December policy meeting, a view reinforced by recent comments from Cleveland Fed President Beth Hammack, who emphasized the Fed's commitment to returning inflation to 2% and the possibility of action if inflation does not cool [1].
CONCLUSION
The US Dollar's broad-based strength, driven by heightened geopolitical risks and firm expectations for a hawkish Federal Reserve, has pressured major currencies including the AUD, IDR, and CAD. Market sentiment remains risk-averse, with investors awaiting key US economic data for further direction. The potential for further USD gains hinges on both geopolitical developments and upcoming macroeconomic releases.