Australian Dollar Slides Following RBA Minutes and Hawkish US Developments
The Australian Dollar (AUD) came under pressure on Tuesday, reversing earlier gains as traders reacted to the Reserve Bank of Australia’s (RBA) May policy meeting minutes and rising concerns about global trade tensions. The Australian Dollae, which had gained nearly 1% on Monday, gave up ground and traded lower amid a cautious policy stance from the RBA and deteriorating Chinese manufacturing data.
Meanwhile, the US Dollar (USD) staged a mild recovery despite increasing stagflationary concerns in the United States, driven in part by hawkish trade rhetoric and stronger bond yields. The Greenback’s strength came as investors shifted their focus to US fiscal and trade policies, as well as the potential for persistent inflation pressures.
RBA Minutes Signal a More Dovish Turn
The RBA’s May meeting minutes hinted at growing support within the central bank for a 25 basis point interest rate cut, marking a shift toward a more dovish stance amid global headwinds. While not yet convinced of the need for a larger 50 basis point move, the board expressed increased concern over external risks, including trade disputes and slowing global growth.
The minutes emphasized the RBA’s preference for policy “caution and predictability”, suggesting that any easing would be gradual and contingent on incoming economic data. RBA policymakers specifically cited US trade policy as a key risk factor, warning of a potentially significant adverse impact on the global economic outlook. Notably, while the board admitted that Australia had so far avoided major fallout from these tensions, it acknowledged the threat posed by escalating tariff actions.
RBA’s Hunter: Global Uncertainty Could Weigh on Australia
Speaking shortly after the minutes were released, RBA Assistant Governor Sarah Hunter reinforced the cautious tone. She warned that “higher US tariffs will put a drag on the global economy,” adding that rising trade tensions could dampen investment, output, and employment in Australia. Nonetheless, she remained optimistic that Australian exporters are relatively well-positioned to navigate these challenges, particularly if Chinese policymakers deliver additional fiscal stimulus to stabilize their economy.
Hunter’s comments highlighted the fine balance the RBA must maintain—acknowledging international headwinds while remaining confident in domestic resilience.
Chinese Data Disappoints: A Negative Signal for Australian Dollar
The Australian Dollar is highly sensitive to Chinese economic data, given Australia’s strong trade ties with China. On Tuesday, market sentiment took a hit after the Caixin Manufacturing PMI in China unexpectedly dropped to 48.3 in May, down from April’s 50.4 and significantly below the market forecast of 50.6. A reading below 50 indicates contraction, fueling fears of a sharper-than-expected slowdown in Chinese manufacturing activity.
Although the NBS Manufacturing PMI edged up slightly to 49.5 from 49.0, it remained in contraction territory, while the Non-Manufacturing PMI dipped to 50.3 from 50.4—both figures failing to meet expectations. The disappointing data reinforced concerns that China’s post-pandemic recovery is losing steam, posing another potential drag on the Aussie Dollar.
US Dollar Gains Amid Hawkish Trade Talk and Policy Developments
Despite rising fears over stagflation, the US Dollar Index (DXY) climbed higher, trading near 98.80 at the time of writing. This strength was underpinned by several key developments in US policy and macroeconomics.
Trump’s Tariff Escalation Spurs Risk-Off Sentiment
US President Donald Trump shocked markets on Friday by announcing a doubling of tariffs on imported steel and aluminum, increasing them to 50% from 25%, effective Wednesday. Trump argued that this move was necessary to protect US manufacturers and intensify pressure on global steel producers.
This aggressive trade posture raised the stakes in the ongoing US-China tariff dispute, particularly after Trump accused Beijing of violating a recent truce agreed in Geneva. US Trade Representative Jamieson Greer echoed these concerns, claiming China had failed to remove non-tariff barriers as promised.
In response, a Chinese Ministry of Commerce spokesperson stated that China had indeed honored the agreement by suspending the relevant tariffs and regulatory measures aimed at the US. Nonetheless, the friction between the two largest economies added to market jitters and strengthened demand for the safe-haven US Dollar.
Legal Drama Surrounds Tariff Moves
A legal tug-of-war further complicated the tariff issue. The US Court of Appeals temporarily reinstated Trump’s tariffs after a lower court ruled that his executive orders exceeded presidential authority. The three-judge panel from the Court of International Trade in Manhattan had initially halted the measures, but the appellate court allowed them to proceed while the legal challenge continues.
US Data Underscores Stagflation Risks
Economic data from the US has been mixed, fueling concerns that the economy may be facing slowing growth and persistent inflation—a stagflationary environment. The Institute for Supply Management (ISM) Manufacturing PMI fell to 48.5 in May, down from April’s 48.7 and below the expected 49.5. This marked the second consecutive contraction and signaled ongoing weakness in the manufacturing sector.
Market participants are also watching the JOLTs Job Openings report, due later on Tuesday, for clues about labor market strength. A softening in job vacancies could reinforce the narrative of a cooling economy.
Trump’s “Big Beautiful Bill” Raises Fiscal Risks
Another major development shaking investor confidence is the passage of Trump’s “Big Beautiful Bill”—a multitrillion-dollar tax and spending package pushed through by House Republicans. The bill, which combines tax cuts with large-scale infrastructure and defense spending, is expected to widen the US fiscal deficit, increasing the risk of higher bond yields and persistent inflation.
Policy analysts suggest that the package could drive borrowing costs higher and intensify “Sell America” flows, as foreign investors dump US assets in anticipation of macroeconomic instability.
Australian Data Softens, Reinforcing RBA Dovishness
Back in Australia, fresh data did little to boost confidence in the domestic economy. ANZ Job Advertisements fell by 1.2% in May, marking the second straight monthly decline after April’s revised -0.3% figure. The drop in job ads hints at a cooling labor market, potentially reducing upward pressure on wages and inflation.
Additionally, the S&P Global Manufacturing PMI slipped to 51.0 in May, down from 51.7 in April. This was the second consecutive monthly decline and the weakest reading since February, suggesting that domestic manufacturing momentum is also fading.
Australian Dollar Outlook: RBA Expected to Cut Rates Amid Global Headwinds
With both domestic and global indicators flashing warning signs, markets are increasingly pricing in further rate cuts by the RBA in the months ahead. While inflation has shown signs of moderating, the combined impact of softening labor demand, weaker Chinese data, and renewed trade tensions has made the case for additional monetary easing more compelling.
RBA Governor Michele Bullock affirmed the central bank’s readiness to act, stating that the RBA would consider “additional action” if the economic outlook deteriorates further. This dovish tone, combined with escalating global risks, suggests that the AUD may remain under pressure in the near term unless there is a significant shift in sentiment or data.
Conclusion: Australian Dollar Faces Tough Terrain
The Australian Dollar’s latest slide reflects a confluence of bearish factors from dovish signals by the RBA and soft domestic data to escalating trade tensions between the US and China. While some support could emerge if US economic conditions worsen and the USD falters, the broader outlook remains clouded by uncertainty. Traders should stay alert to upcoming data releases and central bank communications, which are likely to shape the AUDUSD trajectory in the weeks ahead.
