Aussie and Kiwi dollars surge as traders position for global interest rate rises

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The Australian dollar, Norwegian krone and New Zealand dollar have surged ahead of other major currencies this year, as foreign exchange markets point to a change in the direction of global interest rates from cuts to rises.

The Aussie has gained almost 6 per cent against the US dollar this year, taking it to around a three-year high, as the Reserve Bank of Australia this month kicked off what many analysts expect to be a new cycle of rate increases in response to a burst of inflation. Traders are expecting one or two further quarter-point increases this year.

The New Zealand dollar has jumped almost 4 per cent as traders anticipate the country’s first rate rise in the coming months, while the krone is up more than 5 per cent, as an unexpected increase in inflation last month led traders to price in a small chance of a rate increase in the first half of the year.

The three are the best performing in the so-called G10 group of currencies and point to a major change in the interest rate cycle, as big economies look to end the rate cuts of recent years and refocus on taming inflation, say investors.

These countries were “the canaries in the coal mine” for a broader hawkish shift, said Mansoor Mohi-uddin, chief economist at the Bank of Singapore.

Higher relative interest rates reward investors who hold those currencies, sparking rallies in early movers. 

Sometimes grouped as “commodity currencies” because of the weighting of their economies, the G10 top performers have been helped by rises in the prices of oil, copper and other exports in recent months, say strategists.

Australia is one of the countries at the forefront of the move higher in rates, according to analysts, as its central bank tries to cool price rises in the absence of a slowdown in the housing market or government spending.

Official data on Wednesday showed Australia’s “trimmed mean” measure of inflation — which excludes volatile items such as fresh fruit and fuel and is preferred by the RBA — was 3.4 per cent in the year to January, up from 3.3 per cent for the year to December and higher than analyst forecasts.

“The trimmed mean outcome adds some further risk that the RBA will hike the cash rate in May,” said Adelaide Timbrell, senior economist at ANZ bank.

With Australian interest rates higher than those in the US for the first time since 2017, the Aussie could get “further tailwinds from gradual increases in commodity prices and a fall in the [US] dollar”, said Oliver Levingston, forex strategist at Merrill Lynch.

The three commodity currencies are also benefiting from investors looking to diversify away from the greenback due to concerns over the Trump administration’s volatile US policymaking and rising government debt, say analysts. 

“It’s a combination of rates repricing and investors saying ‘where can I get some political and institutional stability’,” said Dominic Bunning, head of G10 strategy at Nomura.

Anticipation of rate increases elsewhere in the world is one factor that has weakened the dollar in recent months, as the support offered to the US currency from its relatively higher rates is gradually eroded.

The Federal Reserve, which has come under intense pressure from President Donald Trump to reduce borrowing costs, is seen by most traders as still being some way away from the end of its rate-cutting cycle, with two or three quarter-point reductions expected this year.

But some believe the end of the cutting cycle could come sooner, with investment banks JPMorgan and BNP Paribas both expecting the Fed to be on hold all year, due in part to booming economic US growth.

And in minutes from the Federal Open Market Committee’s most recent rate-setting meeting, some members said there were still risks that inflation would remain above the bank’s 2 per cent target for some time and that the next move in rates could be higher. 

The US has “above-trend growth, [and] inflation that’s contained but a bit above target”, said Sam Lynton-Brown, head of global macro strategy at BNP Paribas. “That’s consistent with a Fed that leaves rates on hold.”

The Australian dollar, Norwegian krone and New Zealand dollar are also being boosted by investors hunting for countries with relatively healthy public finances, as concerns over yawning government deficits and growing debt piles hit currencies such as the Japanese yen, the US dollar and the pound.

Such worries have weighed on the yen, even though the country kicked off its own tightening cycle — after years of negative rates — in 2024.

The top three G10 currencies were “fiscally sound currencies with commodity exposure, and so it makes sense they outperform and act as destinations for capital flows as the rotation out of the US continues”, said Mark Nash, an investment manager at fund firm Jupiter.