Australian Dollar Faces Steepest Monthly Decline Since 2022

Highlights:

• Steep Decline: The Australian dollar has dropped over 5% in October, marking its largest monthly fall since 2022, driven by strengthening U.S. Treasury yields.
• Inflation Challenges: Despite a slight decrease in headline inflation, core inflation rose 0.8% in Q3, staying above the Reserve Bank of Australia's target range and increasing pressure on potential rate hikes.
• Market Uncertainty Ahead: The U.S. election and economic policies are expected to keep the Australian dollar volatile, impacting domestic markets and international trade dynamics.

The Australian dollar ($A) has experienced a substantial drop of over 5% in October, marking its largest monthly fall in two years. At the time of writing, the currency is trading at US65.54¢, close to a recent low of US65.43¢ reached on Tuesday. This downturn is mainly attributed to the strengthening U.S. dollar, driven by higher U.S. Treasury yields amid growing concerns over the U.S. election and an expected shift in global financial dynamics.

Inflation Data Adds Pressure

New data released on Wednesday indicates that while headline inflation in Australia for the third quarter showed a slight deceleration, core inflation – the metric preferred by the Reserve Bank of Australia (RBA) – rose by 0.8% over the quarter, slightly surpassing predictions of a 0.7% rise. Yearly, core inflation decreased from 4% in June to 3.5% but remains outside the RBA’s target range of 2% to 3%.

Impact on Reserve Bank's Policy

With core inflation persisting above the RBA’s target, the bank faces mounting pressure as it contemplates future rate decisions. A challenging economic landscape and persistently high inflation may compel the RBA to consider further rate hikes, although the Australian dollar’s recent decline could support export competitiveness.

Looking Ahead

The volatile performance of the Australian dollar is set to impact various economic sectors. With heightened global market pressures, analysts will be closely monitoring the RBA’s policy decisions and any additional indicators from the U.S. Federal Reserve. As the U.S. election looms, continued uncertainty around fiscal policies may also influence further fluctuations in the Australian dollar’s value, affecting both domestic markets and international trade.

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