AUD/USD Slides Amid Rising Geopolitical Risks and Inflation Concerns

The Australian dollar traded in a narrow range against the US dollar on Friday, August 7, extending its weak tone from the previous session. The AUD/USD declined by 0.35% on Thursday due to a stronger US dollar and renewed safe-haven demand.

Escalating geopolitical risks have bolstered the US dollar through safe-haven inflows. A draft proposal by Iran that would prohibit vessels from the United States and Israel from transiting the Strait of Hormuz has fueled geopolitical risk premiums, driving safe-haven capital back into the US dollar. The Houthi militants in Yemen's attack on a Saudi oil tanker has further intensified supply concerns.

The rebound in crude oil prices has rekindled market worries about inflation, strengthening expectations of further rate hikes by the Federal Reserve. The market currently prices in a roughly 54.5% probability of a rate hike in September, pushing US Treasury yields higher.

For the Australian dollar, the dual pressures of a stronger US dollar and rising Treasury yields are constraining its upside potential. Markets are now awaiting the U.S. July nonfarm payrolls report for clearer directional cues, with the Reserve Bank of Australia's policy meeting next week also in focus.