The Australian dollar fell 1.2 per cent on Monday to US70.45¢, its lowest level in two months, as investors dumped the currency and bonds after renewed fighting in the Middle East and a strong US jobs report rattled markets.
Iran's launch of ballistic missiles at Israel over the weekend gave the sell-off its immediate trigger. By Monday, traders were pricing in the risk that interest rate pressure could build in both America and Australia in the months ahead, turning what is usually a sign of economic strength into a fresh reason to sell.
The weekend missile strike was the most serious test yet of a fragile two-month ceasefire between the adversaries, and it hit a market that often uses the Australian dollar as a proxy for global risk. When investors move out of that trade, the currency tends to take the first blow.
The twist is that the US jobs report was strong, not weak. In normal times that would support risk appetite, but it also fed expectations that borrowing costs may stay higher for longer, echoing the pressure already visible in bond markets and in recent discussions around US yields such as those tracked in Interest Rates Today: Deloitte Sees 10-Year Treasury at 3.9% Through 2030, as well as mortgage rate moves in US housing markets.
For now, the question is not whether Monday's drop was sharp — it was — but whether the combination of Middle East escalation and firmer US labour data keeps pushing the Australian dollar and bonds lower as traders reassess how much further interest rates can rise in the months ahead.
