Why is the Australian Dollar falling on a dovish RBA outlook and a firmer US Dollar?

Prospects of a December pause have emerged from the RBA’s divided vote, despite its interest rate increase to 4.85%.
The Australian currency remains under pressure from the central bank’s softer hawkish stance, even as domestic inflation stays elevated.
Cautious market sentiment supports the US Dollar, but lower bond yields and political gridlock cap its gains.

Pressure on AUD/USD persists in Friday’s Asian session, with the pair hovering near 0.6910 after losing over 1% the day before. Less hawkish guidance from the Reserve Bank of Australia tempered expectations of additional interest rate increases, sending the Australian Dollar lower against the US Dollar (USD).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A December pause appeared possible after Australia’s central bank lifted the cash rate by 25 basis points to 4.85% on November 3. The decision was split 6–3, with three policymakers favouring unchanged rates, while explicit references to further tightening were dropped. Despite those signals, RBA Deputy Governor Andrew Hauser indicated on Thursday at the Australian National University in Canberra that inflationary pressures remained very high.

Broad investor caution, meanwhile, lent support to the US Dollar ahead of the forthcoming US Nonfarm Payrolls report. The release is expected to be crucial in determining market expectations for the Federal Reserve’s December policy decision.

Several countervailing forces, however, offset that support for the Dollar. Lower US bond yields in recent sessions, together with continued hopes of diplomatic progress with Iran, are keeping the safe-haven greenback under pressure. The Democrats’ victory has also fuelled expectations of political gridlock in Washington. That could restrict government spending and, ultimately, slow economic growth.

Can Fed tightening and institutional safeguards keep the USD supported?

The wider macroeconomic environment still favours the Dollar, according to strategists at OCBC: “with US growth still solid, inflation sticky and the Fed on track for further tightening, we retain our view that the USD should remain supported, albeit with greater two-way risks.” In their assessment, a Democratic Senate “should also strengthen the institutional guardrails around Fed independence by making it harder for the administration to confirm additional allies to the Federal Reserve Board,” bolstering their expectation that continuity in Fed policy will support the currency, even as uncertainty over the outlook drives greater market volatility.

US Dollar: Frequently Asked Questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No other currency is traded more widely. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to an average of $6.6 trillion in daily transactions. After the Second World War, the USD displaced the British Pound as the world’s reserve currency. Gold provided backing for the US Dollar through most of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

How does Federal Reserve policy affect the US Dollar?

Monetary policy, set by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. The Fed pursues two objectives: price stability, through control of inflation, and full employment. Adjustments to interest rates are its main means of meeting these goals. If prices climb too rapidly and inflation exceeds the Fed’s 2% target, the central bank will increase rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can resort to printing additional Dollars and implementing quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit to a financial system that has become stuck. This unconventional policy is deployed when credit dries up because banks, fearing that counterparties may default, refuse to lend to one another. It is a last resort if interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. The process entails printing more Dollars to purchase US government bonds, mainly from financial institutions. Typically, QE weakens the US Dollar.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

By contrast, quantitative tightening (QT) reverses that process: the Federal Reserve ceases bond purchases from financial institutions and, as bonds in its portfolio mature, does not reinvest the principal in further purchases. The US Dollar generally benefits from QT.