Impact on the Australian Dollar

The Australian Dollar has hit its lowest point in over a month against the US Dollar. This drop follows President Trump’s threat to increase tariffs on Chinese imports, raising fears of a renewed trade conflict with China. Australia’s strong trade ties with China have made the impact on the Australian Dollar more significant. Traders are pulling back from risk-sensitive currencies. The AUD/USD stands at roughly 0.6484, which is a decline of nearly 1.0% for the day, and it looks like it could end the week down as well. At the same time, the US Dollar has also weakened against other major currencies. Trump’s comments have hurt the US economic outlook, leading to less confidence in US assets. The US Dollar Index dropped by 0.38%, moving down from a two-month high to around 99.00. Trump accused China of creating export controls to disrupt markets and suggested that higher tariffs might follow. Plans to meet with China’s President Xi Jinping at the upcoming APEC summit are now uncertain. Adding to worries, the ongoing US government shutdown is creating more uncertainty in global markets. This stalemate is blocking important data releases and raising questions about government spending. We’ve already seen federal worker layoffs begin, as confirmed by Trump’s Budget Director.

The Path Ahead for Traders

We are noticing a pattern that resembles the trade disputes during Trump’s presidency. The Australian Dollar’s reaction to US-China relations is crucial, as any news about tariffs or export restrictions puts pressure on the currency. Historically, this means traders can expect increased volatility in the AUD. Currently, rising tensions over semiconductor technology are creating a risk-off environment. As a result, the AUD/USD has fallen from over 0.68 last month to about 0.6650 this week, reflecting sharp declines seen in the past. This decline comes even though the Reserve Bank of Australia kept interest rates steady at its last meeting. The opportunity and risk remain high, as recent data from the Australian Bureau of Statistics shows that exports to China made up nearly 32% of Australia’s total exports through August 2025. Iron ore prices, a major factor for the Aussie, have also dropped, with futures on the Dalian Commodity Exchange falling over 8% in the past three weeks, from $118 to around $108 per tonne. This makes the AUD particularly sensitive to any negative news. For derivative traders, this situation presents a strong chance to buy volatility. Implied volatility on one-month AUD/USD options has increased from 9% to nearly 12% recently, indicating that the market expects bigger price swings. Positioning for this uncertainty using long straddles or strangles could be a smart strategy. Given the clear risks from trade tensions, buying AUD/USD put options offers a direct way to bet on further weakness. We are also keeping an eye on the AUD/JPY cross, which tends to drop sharply during times of risk aversion as traders seek the safe-haven yen. Historically, the AUD has been weakest against the JPY during such episodes, making it an important pair to watch for bearish positioning. However, the US Dollar is also facing challenges due to mixed inflation signals from the Federal Reserve, making a simple short trade on AUD/USD more complicated. This situation, where both currencies might weaken, reinforces the idea of using options to manage risk. It allows traders to take advantage of movements in the Aussie while protecting against unexpected changes in the dollar’s strength. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now