The US Dollar (USD) continued to strengthen against major currencies, including the Australian Dollar (AUD) and New Zealand Dollar (NZD), amid a hawkish shift in the Federal Reserve's (Fed) policy outlook. The AUD/USD pair extended its losses for the sixth consecutive day, trading around 0.6980 during Asian hours on Tuesday, despite improved preliminary Australian S&P Global PMI data. Specifically, Australia's Manufacturing PMI rose to 51.2 in June from 50.7 previously, Services PMI climbed to 49.9 from 48.7, and Composite PMI increased to 49.8 from 48.7, signaling a recovery in business activity, though not enough to buoy the AUD against the strengthening USD [1].
The US Dollar Index (DXY) hovered near a 13-month high of 101.13, reached on June 19, and was steady around 101.00 during Asian trading. The Fed held its benchmark interest rate steady between 3.50% and 3.75% in June, but updated economic projections and commentary from new Fed Chair Kevin Warsh surprised markets with a more hawkish tone than anticipated. As a result, futures traders have fully priced in a 25-basis-point rate hike for the September meeting, with some even considering a minor probability of a tightening move as early as next month [1][2]. In the case of the NZD/USD pair, it traded in negative territory for the fifth consecutive day around 0.5705, with Fed funds futures pricing nearly an 89% probability of a Fed hike in December, up sharply from 15.2% a week ago, according to CME Group's FedWatch tool [3].
Despite the USD's strength, there are signs that risk aversion may ease due to progress in US-Iran peace talks. US Vice President JD Vance stated that negotiations with Iran had made "great progress," and Iran agreed to readmit International Atomic Energy Agency (IAEA) inspectors. Iranian Foreign Minister Abbas Araghchi also confirmed that the Swiss dialogue had yielded "major progress" [1][2][3]. This diplomatic progress has helped ease concerns about inflation and could potentially support riskier assets like the AUD and NZD, though this effect has not yet materialized in currency markets [1][2][3].
Traders are now shifting their focus to upcoming domestic inflation and jobs data in Australia, as well as the preliminary readings of the US S&P Global PMI, which could further influence currency movements [1][3].
CONCLUSION
The US Dollar's rally is being driven by a hawkish Federal Reserve outlook and rising expectations of further rate hikes, overshadowing improved economic data from Australia and diplomatic progress between the US and Iran. While peace talks may eventually support risk sentiment, the immediate market impact remains a stronger USD and weaker AUD and NZD. Investors are now watching for upcoming economic data releases to gauge the next moves in currency markets.