On March 6, 2026, the Australian dollar is expected to record its first weekly decline in eight weeks, yet it remains above $0.70. The prolonged economic concerns from the Middle Eastern war have led to a 1.4% drop this week, but the Australian dollar still performed relatively well.
The Iranian war has raised global inflation risks, and the market has fully priced in a rate hike by the Reserve Bank of Australia in May, while the probability of a hike by the Reserve Bank of New Zealand is also gaining momentum.
Iran Conflict and Rising Global Oil Prices
On Friday, the Australian dollar rose slightly by 0.2% to $0.7020, after dipping to a low of $0.6974 the previous day. Oil prices surged by $6 per barrel due to reports of a tanker attack in the Gulf waters and China's reduction in fuel exports, intensifying concerns over rising inflation and slowing economic growth.
Australia's Energy Advantage Bolsters the Australian Dollar
Australia, being a net exporter of liquefied natural gas and coal, although a net importer of oil products due to a limited number of refineries, still enjoys a better energy security position compared to large energy importers like Europe and Japan. Barclays analysts noted that the Australian dollar's strong performance among G10 currencies is supported by Australia's robust fundamentals and the commodity cycle related to artificial intelligence, diminishing the relevance of traditional risk sentiment.
Central Bank Rate Hike Expectations Boost the Australian Dollar
As the global bond market re-evaluates inflation risks prompted by the Middle Eastern war, the yield advantage of the Australian dollar becomes a significant driving force for its strength. This week, the U.S. two-year Treasury yield surged by 20 basis points, and futures markets have cooled expectations for the Federal Reserve's easing policy, projecting a rate hike extent reduced to 40 basis points.
The probability of the Reserve Bank of Australia raising the rate again to 4.1% this month has risen to 33%, with the market expecting one more hike by the end of the year.
New Zealand Dollar Strengthens
The New Zealand dollar also climbed by 0.2% to $0.5907, despite accumulating a 1.5% drop this week. Investors are betting that the Reserve Bank of New Zealand will raise rates from 2.25% in September, expecting a cumulative hike of 40 basis points this year, which is more hawkish than the bank's own projections.
Despite facing external pressures, the Australian dollar maintains relative strength above $0.70 due to strong economic fundamentals and a good yield advantage. Similarly, the New Zealand dollar's performance is supported by rate hike expectations, and the future trajectory of monetary policies will continue to impact both countries' currencies.
