On Wednesday, AUD/USD steadied near 0.7220 after reaching a four-month peak of 0.7237 earlier in the session. The Australian dollar relinquished some of its gains as the U.S. dollar rebounded, bolstered by climbing U.S. Treasury yields.
The benchmark 10-year U.S. Treasury yield rose to 4.85%, with the 30-year yield climbing to 5.30%. This increase followed an announcement by the U.S. Treasury Department of a plan to repurchase $6 billion in longer-term government debt — triple the size of its typical operations.
While the operation intends to enhance liquidity and support the smooth functioning of the U.S. government bond market, longer-term yields rose after the announcement, indicating that the expanded buyback may not immediately alleviate selling pressure on U.S. government debt.
Higher yields bolster the U.S. dollar by making U.S. fixed-income assets more relatively attractive. Consequently, the U.S. Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, erased its earlier losses and returned to approximately flat levels on Wednesday.
The dollar’s rebound checked the advance in AUD/USD, which had earlier been buoyed by stronger-than-expected Chinese inflation data. In August, China’s Consumer Price Index (CPI) increased by 0.4%, rebounding from a 0.1% decline in July and surpassing the forecasted 0.3% rise. On an annual basis, inflation accelerated to 0.8% from 0.5%, aligning with market expectations.
The monetary policy outlook for Australia also remains supportive of the Australian dollar. On Tuesday, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser urged additional measures to bring inflation under control.
However, the upside potential for AUD/USD remains constrained by risk-aversion driven by escalating tensions in the Middle East and rising oil prices. Hostilities involving the United States, Iran, and the Houthi rebels heighten the risk of a wider regional conflict, dampening investor sentiment.
Market focus now shifts to the upcoming U.S. Producer Price Index (PPI) report scheduled for Thursday, preceding the Consumer Price Index (CPI) release on Friday.