Australian Dollar to US Dollar (AUD/USD) Exchange Rate Drops on Federal Reserve Rate Hike Forecasts

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United States Dollar (USD)

The Australian Dollar to US Dollar (AUD/USD) exchange rate took a dive on Tuesday as investors priced in the possibility of sooner-than-forecast US Federal Reserve rate hikes.

Many industry experts had hypothesised that a rate increase in June was likely if US data maintained its upbeat momentum. The labour market has been pegged as the sector to watch as an indication of the timeframe surrounding higher borrowing costs as the Fed has reiterated on several occasions that slack was slowing the process down.

However, Friday’s upbeat US labour market data placed the Fed in the spotlight again when Change in Non-Farm Payrolls reached a healthy 295K in February, rather than the 235K forecast. The favourable jump in job creation saw the US Unemployment Rate dip from 5.7% to 5.5%.

Fed’s Richard Fisher Enables US Dollar (USD) Exchange Rate Leap

However, Fed officials have added fuel to the fire—Dallas Federal Reserve President Richard Fisher stated in Monday’s American session that he thought sooner, more gradual increases in interest rates would be more favourable than rushed rate hikes further down the line. Fisher, who is a member of the Federal Open Market Committee [FOMC], is a veteran policymaker and therefore investor sentiment jumped on the statements.

Fisher commented: ‘The idea that we can substitute a steeper future funds-rate path for an early liftoff seems risky to me. I would rather the FOMC raise rates early and gradually than late and steeply.’

Meanwhile, the Australian Dollar sank near to a six-year low against the US Dollar (AUD/USD) as hopes for additional stimulus in China faded.

China increased its quota for bond sales three-fold to $240bn in an attempt to reorganise some of its highest debts.

Economist Louis Kuijs commented: ‘As the space for monetary policy expansion is constrained by the rapid increase in leverage of the past seven years, we have long argued it makes sense to rely more on proper (bond-financed) fiscal policy to support growth.’

Since November the People’s Bank of China (PBOC) has cut interest rates twice—an event which has offered the ‘Aussie’ support on both occasions.

In addition, National Australia Bank’s (NAB) Business Confidence slipped from 3 to 0 in February, showing that rate cuts have failed to improve sentiment.

NAB chief economist Alan Oster commented: ‘Confidence also fell across all industries except manufacturing and wholesale, suggesting common factors such as political and broader economic uncertainty may be at play – perhaps the rate cut acted as a stark reminder of the significant headwinds facing the economy.’

Australian Dollar to US Dollar (AUD/USD) Exchange Rate Forecast

The AUD/USD exchange rate is likely to feel the effects of Australia’s Employment Change and Unemployment Rate stats on Thursday, as well as US Advance Retail Sales.

Any further Federal Reserve remarks are also likely to contribute toward US Dollar movement.

The Australian Dollar to US Dollar (AUD/USD) exchange rate resides at 0.7636. The US Dollar to Australian Dollar (USD/AUD) exchange rate is trending in the region of 1.3104.

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