Australian Dollar on back foot amid global and domestic pressures

The Australian dollar (AUD) has recently fallen to its lowest point in over nine years (v GBP), dipping below 60 US cents—a level not seen since April 2020, and above GBP/AUD 2.15, a level not seen since November 2015. This depreciation is the result of a complex combination of international economic developments and domestic fiscal challenges.

Factors Behind the AUD's Weakness:

Rising Global Trade Tensions
The imposition of significant tariffs by former U.S. President Donald Trump has reignited fears of a global trade war, shaking investor confidence and placing downward pressure on risk-sensitive currencies such as the AUD.

Strength of the U.S. Dollar
Recent policy shifts by the U.S. Federal Reserve, including interest rate adjustments, have strengthened the U.S. dollar considerably, thereby applying additional downward force on the Australian currency.

China’s Economic Slowdown
As Australia’s largest trading partner, China’s economic deceleration—exacerbated by its struggling property sector—has led to a drop in demand for Australian exports, further weighing on the AUD.

Domestic Budget Constraints
Increased government spending has limited Australia’s fiscal capacity to respond to external shocks, heightening the vulnerability of the economy and its currency during periods of global stress.

Consequences of the AUD’s Decline:

Improved Export Competitiveness
A weaker Australian dollar makes local goods and services cheaper for foreign buyers, boosting the competitiveness of Australian exports.

Higher Import Costs and Inflation Risk
On the flip side, the cost of imported goods rises, potentially fuelling inflationary pressures domestically and squeezing household budgets.

Policy Options for the Reserve Bank
The Reserve Bank of Australia may consider monetary policy tools such as interest rate adjustments or targeted interventions in the foreign exchange market to stabilise the dollar and mitigate inflation.

Outlook

The Australian dollar’s slide underscores the country’s exposure to global economic volatility, the strength of the U.S. dollar, and its own internal fiscal limitations. Careful economic management and responsive policy action will be crucial in navigating the road ahead.

Over the past 24 hours, the foreign exchange (FX) market has experienced heightened volatility, largely driven by escalating global trade tensions—most notably the intensifying tariff war between the United States and China. U.S. President Donald Trump’s latest round of broad-based import tariffs, aimed at curbing China’s trade surplus and addressing alleged intellectual property violations, has reignited fears of a full-scale global recession. In retaliation, Beijing has hinted at imposing its own countermeasures, escalating uncertainty and further disrupting investor confidence across global markets.

In response to the mounting uncertainty, investors have sought refuge in traditional safe-haven assets. The Swiss franc appreciated notably, with the U.S. dollar falling to a six-month low against it—down 0.44% to 0.8572 francs. The Japanese yen also strengthened sharply, highlighting the global flight to safety. The yen's rally was bolstered by growing concerns over China's economic trajectory amid the tariff standoff and the broader implications for East Asian markets.

This shift in investor behaviour underscores a deepening aversion to risk as trade rhetoric between the world's two largest economies continues to escalate. Market participants are bracing for prolonged disruptions to global supply chains and reduced cross-border investment.

GBP under pressure

The British pound came under considerable pressure, falling to a one-month low against both the U.S. dollar and the euro. Sterling declined to $1.2825—a 0.5% drop on the day—adding to a 1.5% loss recorded last Friday. The pound’s depreciation reflects investors’ concerns about the UK’s heavy reliance on international trade, making it vulnerable to ripple effects from the U.S.-China economic dispute. Fears of reduced global demand and supply chain instability are weighing heavily on the outlook for UK growth.

Increased demand for USD

Despite broader risk-off sentiment, demand for U.S. dollars surged among non-U.S. investors seeking liquidity. This trend is reflected in sharp moves in three-month cross-currency basis swaps, particularly in the euro, pound, and Japanese yen. The euro swap rate dropped to -5.375%, its lowest level since November 2023, signalling a scramble for dollar funding amid tightening credit conditions and heightened market stress.

This dynamic illustrates the paradox of the dollar’s role: while U.S. protectionist policies are a key source of current market instability, the dollar remains a cornerstone of global liquidity and a preferred currency during crises.

Central bank interventions

Amid the market turmoil, Taiwan’s central bank issued a statement asserting its readiness to intervene in currency markets to stabilize the Taiwan dollar. The central bank emphasized its robust foreign exchange reserves and its capacity to manage short-term volatility. Authorities across Asia are increasingly vigilant, fearing that persistent USD strength and yuan depreciation could lead to competitive devaluations across the region.

China's own central bank has thus far refrained from direct intervention but is closely monitoring the yuan’s exchange rate, which has faced downward pressure in recent days. A weakening yuan could further inflame tensions with Washington, potentially prompting even more aggressive U.S. trade actions.

Market sentiment and outlook

Market sentiment remains firmly risk-averse. Global equity markets have recorded steep declines, while volatility gauges such as the VIX have surged—reaching 60, the highest level since a significant market selloff last August. Traders and analysts are increasingly concerned that the U.S.-China tariff conflict may evolve into a prolonged economic cold war, with lasting implications for global trade, investment flows, and monetary policy.

With no signs of de-escalation in sight, analysts anticipate continued turbulence in the FX market. Currency movements are likely to remain reactive to geopolitical headlines, central bank policy signals, and any further retaliatory trade measures between Washington and Beijing.

Euro shows mettle amid market mayhem, but storm clouds loom

In the midst of last week’s turbulent global market sell-off, the EUR displayed an impressive degree of resilience against the USD. However, this show of strength may prove short-lived, with the single currency potentially becoming anchored just above the 1.0850 mark should trade tensions between Brussels and Washington escalate.

Although the EUR/USD pairing dipped by less than a percentage point on Friday—despite intensifying hostilities between the US and China that dragged numerous currencies lower by as much as 5%—the euro actually managed to post notable gains on several cross rates. This was largely thanks to the broad rally in the USD.

Nonetheless, the EUR's recent advances may soon unravel, particularly if the European Commission retaliates against the United States' recently announced 20% “bespoke reciprocal tariff,” which came into effect last Wednesday. Should Brussels opt for a tit-for-tat response, it could trigger a fresh salvo from Washington, in line with President Trump’s recent warning that any retaliatory measures would be met with yet more punitive tariffs.

Such a scenario could weigh heavily on the EUR, not only in its pairing with the dollar but also across the board, especially amid growing anxiety over the broader economic implications for the Eurozone. Still, some observers remain cautiously optimistic, suggesting the euro might find support from the greenback’s flagging performance this year against other major currencies.

Adding to the uncertainty is the uneasy relationship between the trade-weighted dollar and China’s managed exchange rate system. Beijing’s commitment to its basket-based currency approach has kept both the offshore (USD/CNH) and onshore (USD/CNY) dollar-yuan exchange rates relatively stable—despite mounting pressure from US trade measures. Yet, this hasn't prevented either the dollar or the yuan from slipping notably against other currencies.

Sterling stumbles, but glimmers of hope remain amid global trade jitters

GBP suffered a sharp setback against the USD on Friday, caught in a broader market upheaval. Yet, a partial rebound towards the 1.2947 mark and beyond could still be on the cards—particularly if overly bleak perceptions of the US economic outlook and weakening fundamentals begin to weigh once more on the greenback in the days ahead.

Against the EUR, GBP also endured a challenging week, tumbling to its lowest level in eight months—briefly dipping below 1.17—as the single currency outpaced GBP in weathering last week’s market storm. Even so, a modest recovery may be possible should the euro falter, with key technical levels at 1.1813 and 1.1880 offering potential footholds.

The EUR’s resilience came into sharper focus on Friday as it posted notable gains, particularly against currencies like the Australian dollar (AUD), which plunged by over 4% at one stage. By contrast, GBP slipped by as much as 1% against the EUR, reflecting investors' relative preference for the single currency during heightened volatility.

However, this trend could yet reverse. The EUR's ascent may face headwinds if trade tensions between Brussels and Washington intensify. The spectre of retaliatory tariffs looms large following President Trump's warning last week that any countermeasures would be met with even more aggressive US levies.

Should such a tit-for-tat scenario unfold, the EUR’s recent gains could unravel, giving GBP a window of opportunity to claw back some ground—especially in the absence of fresh UK-specific shocks. That said, the spotlight will turn to Friday’s release of February’s UK GDP figures, which could temper any bullish momentum for the pound.

If the data paints a picture of economic stagnation—under the weight of elevated borrowing costs and a gloomier public mood ahead of looming fiscal changes in April—then hopes of a sustained recovery in GBP/EUR may have to wait a little longer.

Dollar falters amid tariff fears

The foreign exchange market is currently facing considerable volatility, particularly involving the US Dollar (USD), Euro (EUR), and British Pound (GBP). This instability has been largely sparked by the recent announcement of wide-ranging tariffs by former U.S. President Donald Trump, which has fuelled concerns of a looming global trade war and a potential economic downturn.

The USD has seen a notable decline in reaction to the new tariff measures. The dollar index recorded its sharpest fall since November 2022, dropping by 1.9% on Thursday, followed by a further 0.3% decrease on Friday. This slump is attributed to investor anxiety over the broader economic impact of the tariffs, which has led to a significant reassessment of the U.S. Federal Reserve's monetary policy outlook. Market expectations now point towards four quarter-point interest rate cuts in 2025.

EU Condemns U.S. tariffs as euro strengthens across markets

Ursula von der Leyen, President of the European Commission, expressed regret over the United States’ decision to introduce additional tariffs, warning that the move would likely fuel inflation. She further cautioned that the European Union would consider retaliatory measures should ongoing negotiations fail to yield a resolution.

Von der Leyen emphasised that tariffs were not the answer, even if certain countries were indeed violating trade rules, as claimed by former President Donald Trump. She expressed hope that there remained time to advance discussions on trade between the EU and the U.S.

The EUR has gained ground against the weakening dollar, appreciating by 2.4% as investors pivot towards more stable currencies. This upward movement signals eroding confidence in U.S. financial and economic stability, prompting a reallocation of capital into the euro. The euro also rallied across other currency pairs. Both the AUD/EUR and NZD/EUR dropped to new five-year lows, while the EUR/USD reached its highest level in 21 months. Before Wednesday’s announcement, the EUR/USD pair had already climbed above 1.0860, with the euro continuing to strengthen as yield differentials narrowed and pressure built on U.S. interest rates.

Similarly, the GBP has strengthened relative to the USD. Historically, April has tended to be a mildly positive month for the GBP/USD pair, with an average return of 0.31% over the last five decades. March witnessed an impressive rally in the pair, climbing over 4%, buoyed by fiscal stimulus in Europe and intensifying concerns over the U.S. economic outlook.

Overall, the FX landscape is currently defined by a weakening US Dollar and strengthening Euro and Pound, as shifting trade dynamics and heightened uncertainty weigh on investor sentiment.