Australian Dollar Strengthens on Rising Risk Sentiment and Diverging Rate Expectations

Highlights:

• The Australian dollar traded near US65.34¢ at the time of writing, gaining 0.7% on Monday.
• The AUD climbed to a 12-year high against the NZ dollar, driven by diverging rate outlooks.
• Markets anticipate the RBNZ will lower its cash rate, whereas the RBA is expected to maintain its current stance, helping to keep the Australian dollar supported.

The Australian dollar strengthened further at the time of writing, trading near US65.34¢, supported by improved global risk appetite and encouraging signals that the US federal government may soon resume operations. The positive sentiment also supported major domestic lenders, including Westpac Banking Corporation (ASX: WBC), which closely tracks currency and interest rate expectations across the region.

Aussie Posts Its Biggest Daily Gain in Nearly Three Months

The local currency rose 0.7% on Monday, marking its largest one-day increase in almost three months. The gains came as investors became less worried about extended political deadlock in the US. Expectations that lawmakers in Washington will soon reach a deal to restart government operations lifted interest in risk-linked currencies like the Australian dollar. Higher appetite for commodities and stronger equity market performance also contributed to renewed support for the AUD as global investors temporarily shifted away from safe-haven assets.

Australian Dollar Hits 12-Year High Against the New Zealand Dollar

The Aussie also surged to a 12-year high of NZ$1.1585 against the New Zealand dollar, driven by expectations that the Reserve Bank of New Zealand (RBNZ) is preparing to lower interest rates. Markets widely anticipate a 25-basis-point rate cut, with some analysts even flagging the possibility of a larger reduction. Meanwhile, the Reserve Bank of Australia (RBA) is projected to keep its cash rate at 3.6% for an extended period, signaling a stable policy outlook. Some economists believe the current easing cycle may have already peaked, reducing pressure for further cuts.

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