Australian Dollar Holds Near 0.669 on Tightening Expectations; US Dollar Index at 99.3 Heads for Third Weekly Gain

Sydney | Washington | EcoPulse24

The Australian dollar traded steadily near 0.669 US dollars during Friday's session, poised for modest weekly gains amid heightened expectations of monetary tightening by the Reserve Bank of Australia. This comes as the US dollar maintains its momentum, supported by resilient US economic data.

In Australia, major banks have fueled bets that interest rates will stay high for longer. Commonwealth Bank of Australia raised resident mortgage rates by up to 0.7 percentage points, pushing the lowest fixed two-year rate to 5.79%. Macquarie Bank followed with a 0.25-point increase across all fixed loan terms. These moves extend similar hikes by other major banks in December, strengthening tightening expectations.

Markets now price a 27% probability of a 25-point rate hike in February, rising to nearly 76% by May. The Australian dollar also drew support from global equity gains, notably as the Australian stock market posted a fifth consecutive session of gains, nearing a two-month high.

Conversely, the US dollar index held near 99.3, heading for a third straight weekly gain, as expectations for rate cuts waned after strong data. Weekly jobless claims were well below forecasts, highlighting labor market strength, while some manufacturing indicators also outperformed. Federal Reserve officials cautioned about potential inflation risks and a stable labor market.

Markets widely expect the Fed to keep rates unchanged at its upcoming meeting, with the next rate cut bets pushed to June or beyond. On the trade front, the US agreed to reduce tariffs on Taiwanese goods from 20% to 15%, in exchange for Taiwanese firms committing at least $250 billion to expand chip manufacturing capacity in the US.

Analysis:
Diverging monetary paths are simultaneously supporting both the Australian and US dollars, though for different reasons. The Australian dollar benefits from potential local tightening and equity momentum, while the US dollar's strength is underpinned by economic data that reduces the urgency for rate cuts. This balance may keep the AUD/USD pair in a tight range, with increased sensitivity to upcoming central bank decisions or data surprises.