Renewed signs of cooperation between the world's two biggest economies are driving a rise in the Australian dollar, which reached a two-week high of US65.45¢ at the start of the week. Optimism is building that an agreement might emerge from an upcoming summit, pushing the Aussie higher, although outcomes around interest rates and inflation will remain key.
Global markets are closely following high-level meetings between US and Chinese leaders, which are scheduled to take place in South Korea. Investors are hopeful that trade tensions, which have weighed on the global economy since early 2018, may begin to ease. Reports that the US could cancel planned 100% tariffs if China delays rare earth licensing and boosts agricultural imports have renewed support for risk-sensitive currencies such as the Australian dollar.
Part of the uplift is also linked to the US Federal Reserve's widely expected move to cut interest rates again. Markets are pricing in a 97% chance of a quarter-point reduction. This would bring the federal funds rate closer to Australia's, narrowing the yield gap and making the currency more attractive to investors. Australian 10-year bonds currently offer a higher yield than their US counterparts, at 4.2% compared to 4%.
The Aussie has already gained nearly 6% this year as investors shift away from the US dollar. Analysts believe the local currency could continue rising, especially if Thursday’s summit produces meaningful outcomes. Some projections now suggest the dollar could reach US66.50¢ or possibly US70¢ by December, a level last seen in early 2023, although the strength of any agreement may influence that outlook.
Another driver of the currency’s momentum is the upcoming Australian inflation report. A stronger reading could reduce the likelihood of future rate cuts by the Reserve Bank of Australia, helping to support the Australian dollar further. Current estimates indicate that core inflation may rise 0.8% in the September quarter, which would be above the central bank’s expectations and could lead to rates staying higher for longer.
Still, analysts advise caution. While the outlook appears positive, much depends on the results of this week’s US-China meetings and whether the Fed gives signals about additional rate cuts. In the meantime, traders and economists are closely monitoring developments with growing confidence that the Australian dollar could finish the year stronger.
