Aussie Dollar Falls Prey to China Rift Even As Commodities Soar

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Australia’s dollar took a beating after tensions with China escalated, underscoring its sensitivity to geopolitical tensions even as commodity prices are soaring.

The currency weakened against all its major peers after China halted an economic dialogue with the South Pacific nation in the latest tit-for-tat between the two trading partners. The currency may decline further if Beijing follows up with more restrictions that could further strain the relationship, according to strategists.

The Aussie’s drop defies a rally in commodity prices and reinforces how trade tensions are exerting a greater influence on the currency’s moves. Iron ore, Australia’s top export earner, is heading for a record while other resources such as copper and oil are also gaining amid signs of a global growth recovery.

“Any official China government announcement to further weaken the relationship with Australia is a negative for Australia’s export outlook and thus for Australian dollar,” said Sean Callow, strategist at Westpac Banking Corp. in Sydney. “The fall in the Aussie is a bit surprising but it is a good test of sentiment.”

Aussie Dollar Falls Prey to China Rift Even As Commodities Soar

The Aussie dropped as much as 0.6% to 77.01 U.S. cents after China’s announcement, before trimming its losses to trade at around 77.24 cents.

Stocks also retreated. China’s CSI 300 Index fell as much as 1.7% while Australia’s benchmark S&P/ASX 200 gauge slid 0.8%.

The tensions “may not show up in Australia’s terms of trade or the BHP, Rio Tinto profits in the short term, but the level of uncertainty and risk over the longer term are real,” said Kyle Rodda, an analyst at IG Markets Ltd. “China is trying to break some of its dependence on key suppliers like Australia, and the latest news may be one example of such.”

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