The Australian dollar steadied around $0.709, holding its latest pullback but still trading near three-year highs and on track for a strong weekly gain. Support came from expectations of higher domestic interest rates, which helped offset mounting global risk aversion.
Market sentiment remained fragile as Iran intensified attacks on oil and transport infrastructure across the Middle East, while the new Supreme Leader vowed to keep the Strait of Hormuz effectively closed. The prolonged conflict pushed oil prices higher on concerns over constrained energy supplies, heightening fears of a global economic slowdown.
Despite the deteriorating external backdrop, the Australian dollar continued to draw support from bets that the Reserve Bank will raise its cash rate by 25 basis points to 4.10% next week in an effort to rein in inflation. Rising domestic cost-of-living pressures, particularly from higher fuel prices, led markets to assign a 78% probability to a rate increase at the March 17 meeting, up from below 30% earlier in the week. A further move is fully priced in by August, with traders anticipating around 60 basis points of total tightening over the course of the year.
