Aussie Faces Headwinds as Global Bond Selloff Narrows Yield Edge

The Australian dollar is coming under renewed pressure as the yield advantage it holds over US assets wanes and investors brace for a possible escalation to hostilities in the Middle East.

The currency has fallen 0.7% this week to trade around 71 US cents, the weakest performance among Group-of-10 peers and putting it on track for a second consecutive weekly decline. The Aussie may slide below 70 cents in the near term, according to AT Global Markets.

The moves comes as investors dump bonds on concern central banks will need to keep interest rates elevated to contain oil-fueled inflation pressures. While Australian debt has joined the global selloff, the yield gap to US Treasuries has narrowed to the smallest since November, sapping support for the currency and increasing the risk of deeper losses if Middle East tensions escalate.

To a certain extent, the Aussie has lost its yield support and “could take a harder hit than some of the other majors if the yield differential remains tighter in the next couple of days,” said Nick Twidale , chief market analyst at AT Global Markets. “On top of this, the threat of a resumption of hostilities in the Gulf could add further fuel to that fire and hit the Aussie hard as well.”

The erosion in yield support threatens to unwind the Aussie’s more than 6% rally this year, as the Reserve Bank of Australia lifted rates to the highest since December 2024 to curb inflation. Policymakers have since signaled a , while traders ramp up bets that peers will begin tightening.

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“The narrowing of Australia-US interest rate differentials can continue to weigh on Aussie dollar,” Carol Kong , a strategist at Commonwealth Bank of Australia, wrote in a note to clients. “Aussie dollar can test support at 70.64 cents over the next 24 hours,” especially if the Fed’s meeting minutes are hawkish, she wrote.