AUD/USD recovered after opening with a gap down and traded near 0.7070 in Asian hours on Monday. The pair fell earlier as risk aversion rose after the United States and Israel carried out coordinated strikes on Iran over the weekend.
Reports said the operation killed Iran’s Supreme Leader, Ayatollah Ali Khamenei. US President Donald Trump said US military operations in Iran are “ahead of schedule”, according to CNBC.
Australian Inflation Gauge Slips
Australia’s TD-MI Inflation Gauge fell 0.2% month-on-month in February, after a 0.2% rise in the prior month. This was the first monthly decline since last August.
Traders were set to watch China’s RatingDog Manufacturing Purchasing Managers’ Index later in the day. Changes in China’s economy can affect the Australian dollar due to trade links between the two countries.
The pair could face more pressure as the US Dollar Index rose to six-week highs near 98.00 at the time of writing. Demand for the US dollar increased as a safe-haven during the Middle East conflict.
We remember the market shock in early 2025 when coordinated US-Israeli strikes on Iran were announced. The AUD/USD gapped down on the news, initially finding a shaky floor around 0.7070. This event triggered a significant wave of risk aversion across all asset classes.
Market Volatility And Dollar Strength
The immediate impact was a surge in energy prices, as we saw Brent crude futures jump nearly 40% to over $115 a barrel in the weeks following the strikes. Market volatility exploded, with the VIX index spiking from the mid-teens to above 30, a level not seen since the banking turmoil of 2023. This environment was extremely hostile for risk-sensitive currencies like the Aussie dollar.
That initial strength in the US Dollar Index, which pushed it to 98.00, was just the beginning of a sustained rally throughout 2025. Safe-haven demand and persistent inflation fears saw the DXY eventually peak above 106 by the third quarter. This dollar strength created a powerful headwind for the AUD/USD pair.
Domestically, the weak inflation data from early 2025 proved to be a persistent theme, forcing the Reserve Bank of Australia to pause its hiking cycle much earlier than the US Fed. Adding to the pressure, China’s economic activity slowed through mid-2025, with manufacturing PMI data consistently hovering around the 50.0 contraction line. This dual pressure from a strong USD and a weak key trading partner drove the AUD/USD to an eventual low near 0.6300 late last year.
Now, with tensions in the Middle East having stabilized and Brent crude settling into a range near $85 a barrel, we are seeing volatility recede. Derivative traders should consider that peak dollar strength may be behind us, as implied volatility on forex options has fallen by over 25% since the start of this year. This environment suggests positioning for a potential recovery in the Aussie dollar by considering strategies like buying AUD/USD call options or selling out-of-the-money puts to collect premium.
