The Australian dollar strengthened against the US dollar in Asian trade on hopes that tensions between the US and Iran are easing.
The positive sentiment has boosted investor interest in risk assets including commodity currencies such as the Australian dollar.
According to Westpac’s chief foreign exchange strategist, Richard Franulovich, reports of a possible US-Iran deal suggest more serious talks are underway.
However, he said the Australian dollar needs more solid development to break above the USD0.7200 level on a sustained basis, including the official announcement of the reopening of the Strait of Hormuz.
The Strait of Hormuz is a vital route for global oil trade. The reopening of the route is expected to help stabilise global energy supplies and ease pressure on oil prices.
This could boost investor confidence and support the rise of risk currencies.
Market data showed the Australian dollar rose around 0.6 percent to USD0.7166. Other Asian currencies such as the South Korean won and the Japanese yen also strengthened against the US dollar as “risk-on” sentiment returned to the market.
CBA said the US dollar's weakness earlier in the week was influenced by expectations that the US-Iran conflict is getting closer to a resolution.
The market is currently monitoring developments regarding the opening of the Strait of Hormuz as well as the recovery period for global energy production.
Meanwhile, OCBC said the market remains cautious as the issue of Iran's nuclear program is still unclear.
However, if a peace deal is successfully reached and oil prices decline, the US dollar is expected to continue to weaken while the Australian dollar has the potential to record higher gains.
