Australia’s currency has climbed to its highest level in nearly two years, offering relief to import-reliant retailers and suppliers while complicating the outlook for interest rates as inflation pressures remain in focus.

The Australian dollar closed at US$0.72 overnight, its strongest level since June 2022, after rising 0.9% on improved global risk sentiment and optimism surrounding a potential easing of conflict in the Middle East. The stronger currency is expected to act as a buffer for businesses facing elevated input costs, particularly those reliant on imported goods priced in US dollars.

IG market analyst Tony Sycamore said the rebound follows a correction from late-March lows, with the currency supported by improving investor sentiment and expectations that the Reserve Bank of Australia (RBA) may tighten monetary policy further in the near term.

“The recent pullback was a correction within a broader uptrend,” Sycamore said, noting technical support around US68¢ had held. “A sustained break above US71.89¢ would reinforce the bullish outlook and could see the Australian dollar test US74¢ in the coming weeks.”

A stronger Australian dollar typically helps dampen imported inflation by reducing the cost of overseas goods, including fuel, electronics and apparel. However, this could present a policy dilemma for the RBA. While easing price pressures may reduce the urgency for aggressive rate hikes, persistent strength in the labour market could keep upward pressure on inflation, particularly in services.

Fresh labour force data from the Australian Bureau of Statistics showed the economy added just under 18,000 jobs in March, with the unemployment rate holding steady at 4.3%. The result was slightly below economists’ expectations of a 25,000 increase in employment and a dip in unemployment to 4.2%.

Despite ongoing geopolitical tensions, including the early stages of the Iran conflict captured in the data period, economists said any labour market impact from the war is likely to emerge gradually rather than immediately.

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The composition of employment highlighted continued resilience, with full-time jobs increasing by more than 50,000, offset by a 35,000 decline in part-time roles. Meanwhile, the participation rate edged lower to 66.8%, indicating a slight pullback in the share of Australians either working or actively seeking employment.

For the RBA, the combination of a firm labour market and still-elevated inflation presents a complex outlook. While a stronger currency may help ease tradables inflation, policymakers remain concerned about sticky domestic price pressures, particularly in housing, services and wages.

Markets are increasingly pricing in the possibility of further rate rises if inflation proves more persistent than expected. A resilient jobs market reduces the risk of a sharp economic slowdown, potentially giving the central bank scope to maintain a tightening bias.

However, higher interest rates would add to cost-of-living pressures for households and could eventually weigh on retail spending—offsetting some of the near-term benefits retailers gain from a stronger currency.

The RBA’s next moves are likely to hinge on upcoming inflation data and whether the current combination of currency strength and labour market resilience is sufficient to bring price growth back within its target band without further policy tightening.