The Australian dollar dropped to a near two-month low on Tuesday even after the Reserve Bank of Australia raised its cash rate for the fourth time this year. Traders shifted focus to Australia's shrinking yield advantage over the United States as the dollar index held near a two-month high on rising Treasury yields.
The Australian dollar slid 0.4% to $0.6989, breaching the $0.7000 level to touch its lowest point in nearly two months. The drop came despite the Reserve Bank of Australia delivering a widely expected 25-basis-point increase in its cash rate to 4.60%, a 15-year high.
RBA delivers fourth hike of the year
The rate increase was the RBA's fourth this year and was decided unanimously. Governor Michele Bullock warned that persistent underlying inflation, elevated energy costs, and weak productivity growth threaten price stability.
However, money markets had already fully priced in the move. As a result, foreign exchange desks turned their attention to Australia's eroding yield advantage against rising U.S. borrowing costs, leaving the Aussie vulnerable to further downside.
Dollar firm as Treasury yields surge
The U.S. dollar held near a two-month high on Tuesday, maintaining its dominance over major rival currencies as surging Treasury yields and expectations for further Federal Reserve tightening continued to drive the global exchange-rate tape. Behind the move, the dollar index rose 0.1% to 101.30 after touching an intraday peak of 101.33, and it remains on track to close out September with a 1.9% advance.
Meanwhile, the 10-year Treasury yield held near its highest level since July 2007 at 5.23%, while the 30-year yield hovered near 5.55%, its highest since 2004. With money markets now discounting a better than 70% chance of a quarter-point Fed rate hike in October, cross-border yield differentials continue to favor the greenback across European and Asian trading sessions.
Source: Investing.com
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