Australian Dollar Strengthens as USD Faces Growth Headwinds.
The Australian Dollar (AUD) maintained its upward trajectory against the US Dollar (USD) on Monday, gaining over 0.50% as risk appetite improved slightly despite escalating US-China trade tensions. The AUDUSD pair buoyed by expectations of US economic slowdown and potential inflation persistence, both of which threaten to weaken the Greenback in the short to medium term.
Investors grew cautious after US President Donald Trump pledged to double import tariffs on steel and aluminum, further stoking fears of a reignited trade war between the world’s two largest economies. Despite a string of soft domestic data, the Aussie Dollar remained resilient, underpinned by hopes of stimulus measures in China and anticipation of dovish signals from the Reserve Bank of Australia (RBA).
Trump’s Tariff Threats Ignite Fresh Trade War Concerns
President Trump, speaking at a campaign rally in Pennsylvania, announced that the US would raise tariffs on imported steel and aluminum from 25% to 50%. The policy, aimed at shielding domestic steel producers, is likely to provoke retaliatory measures from China and other key trading partners. Trump’s remarks followed accusations that China had failed to uphold its commitments to reduce reciprocal tariffs.
“I’m going to make sure our steel is protected like never before,” Trump said, adding that the move was critical for “national security and economic sovereignty.”
The policy shift comes at a sensitive moment for global markets, already uneasy about the fragile truce between Washington and Beijing. Last month, both countries agreed to ease some tariffs during a Geneva meeting, but that agreement appears to be unraveling rapidly.
Judicial Tug-of-War Over Trump’s Tariffs
While Trump’s administration is moving to enforce the new tariffs, legal pushback is intensifying. A three-judge panel at the US Court of International Trade ruled that the “Liberation Day” tariffs proposed by Trump exceeded executive authority, temporarily blocking their implementation. However, the US Court of Appeals for the Federal Circuit reversed this decision, allowing the tariffs to proceed—for now.
This legal uncertainty adds further complexity to an already volatile situation, with global markets watching closely for signals of whether the protectionist policies will be sustained or reversed.
US Dollar Index Pressured Below 100
The US Dollar Index (DXY), which tracks the USD against a basket of six major currencies, was hovering around 99.50 at the time of writing. The index has shown signs of weakness amid mixed US economic data and growing policy risks associated with Trump’s trade strategy.
Investors are awaiting the release of the US ISM Manufacturing PMI for May, a key indicator that could confirm whether American industry is slowing. Any sharp decline would likely weigh further on the USD, potentially lifting the AUD/USD pair even higher.
Australian Job Market Loses Steam
In Australia, the latest ANZ Job Advertisements data revealed a 1.2% decline in May, following a downwardly revised 0.3% drop in April. This marks the second consecutive month of contraction in job postings, signaling cooling momentum in Australia’s labor market.
This downbeat employment data was compounded by weaker manufacturing sentiment. The S&P Global Manufacturing PMI fell to 51.0 in May from 51.7 in April, marking a second straight monthly decline and the lowest reading since February.
Although these data points might normally weigh on the AUD, traders appear more focused on external macroeconomic risks—particularly from the US and China—than domestic soft patches for now.
Australian Retail and Housing Sectors Also Falter
Australia’s April Retail Sales slipped by 0.1% month-over-month, contrary to expectations of flat 0.3% growth. Building Permits also disappointed, tumbling 5.7% versus the anticipated 3.1% increase. The weak readings from key consumption and construction sectors underscore growing vulnerabilities in Australia’s economy.
Despite these signals of weakness, the AUD has managed to retain strength—largely due to speculation that the RBA could deliver further rate cuts to support growth, while still maintaining its edge over a potentially more volatile USD.
RBA Keeps Door Open for More Easing
Reserve Bank of Australia (RBA) Governor Michele Bullock recently stated that while inflation is moderating, downside risks remain high due to global trade frictions. She emphasized that the central bank remains ready to act if the economic outlook worsens sharply.
“The RBA is monitoring the situation very closely,” Bullock said. “If conditions deteriorate, we are prepared to adjust policy accordingly to ensure continued economic stability.”
Market participants now see increasing odds of a rate cut in the second half of 2025. While further easing could weigh on the AUD over time, investors currently view RBA dovishness as relatively measured compared to the mounting policy and legal uncertainties facing the US Dollar.
China’s Mixed PMI Keeps Aussie Traders Alert
The Australian Dollar is often viewed as a proxy for Chinese economic sentiment due to the close trade relationship between the two nations. The latest PMI data out of China offered a mixed picture. The National Bureau of Statistics (NBS) reported that China’s Manufacturing PMI rose modestly to 49.5 in May from 49.0 in April, still below the expansion threshold of 50. However, Non-Manufacturing PMI edged down to 50.3 from 50.4, falling short of expectations.
Although not overtly bearish, the mixed data suggests continued weakness in the world’s second-largest economy. That said, hopes of monetary easing by the People’s Bank of China (PBoC) continue to offer some support to the AUD.
China May Deploy Targeted Stimulus to Stabilize Growth
Reports from China’s Securities Times suggest the PBoC may increase its use of Pledged Supplementary Lending (PSL), a targeted tool used to inject long-term funding into policy banks. The goal is to shore up financing for key infrastructure and housing sectors. If confirmed, such moves would be bullish for Australian commodity exports, particularly iron ore and copper—key inputs for construction and manufacturing in China.
Any substantial stimulus in China tends to be favorable for the Australian Dollar due to trade interdependence, providing a potential tailwind for the AUDUSD pair in the coming weeks.
Conclusion: Australain Dollar Supported by USD Weakness and China Stimulus Hopes
Despite weak domestic indicators, the Australian Dollar has remained resilient due to a combination of US Dollar vulnerability, rising expectations of Chinese stimulus, and growing uncertainty around Trump’s trade agenda. As traders brace for a potentially volatile June, the AUDUSD could continue its upward momentum if US economic indicators disappoint and trade tensions worsen further.
Upcoming events—including the US ISM PMI, Federal Reserve commentary, and potential announcements from China’s central bank—will be critical in determining the pair’s next direction.
