Interest rate decision may give the Aussie dollar’s rise another leg up

The Australian dollar’s recent strength is tipped to continue, but there are some headwinds to overcome first, economists say.

The Australian dollar’s moves are driven by the US dollar. Picture: Lukas Coch

A rising Aussie dollar in recent months has been good news for travellers heading overseas for winter breaks, and it may be the start of a stronger push higher.

Our currency climbed 6 per cent between April and July, from US64c to US68c, but in the past week has slipped back near US67c. It also has improved against key currencies such as the euro and yen.

Central banks globally are shifting to interest rate cuts while the Reserve Bank of Australia ponders another rate rise, and economists say higher-for-longer rates here will help strengthen our dollar.

AMP chief economist Shane Oliver said the Aussie dollar was “cheap” and he expected it to climb to US70c or slightly higher into 2025.

“On most measures that economists look at, the Aussie dollar is below what you would consider fair value,” he said

The Australian dollar has climbed recently risen against the US dollar. Picture: iStock

Dr Oliver said negative global investor sentiment towards the Aussie left it primed for a potential rally, commodity prices looked to have entered a new super cycle, and interest rate differentials were likely to shift in favour of Australia.

“It can go higher but I don’t think we can have another run up like we had in the 2000s, where we got above parity and kept going to $US1.10,” he said.

“That was a period of very high and rising commodity prices, and in 2011 our interest rate was 4.5 per cent above the US.” This meant investors earned more money keeping cash in Australia compared with the US.

Today, the RBA cash rate of 4.35 per cent is well below the current US Federal Reserve funds target rate of 5.25-to-5.5 per cent.

“When Australian rates are above US rates, it tends to attract money to Australia,” Dr Oliver said.

CommSec senior economist Ryan Felsman said the Aussie dollar’s performance largely depended on the US dollar.

“That’s dictating the situation at the moment,” he said.

Mr Felsman said Australia’s inflation numbers due on July 31 data “could change everything” if they prompted the RBA to raise rates again.

“At the moment we have a rate hike 27 per cent probability priced in for August,” he said.

“Australia is a significant outlier, given a US rate cut is fully priced in for September.”

Working against the Aussie dollar was weaker demand from China, Mr Felsman said. The Aussie is the world’s fifth most traded currency – behind the US, euro, yen and pound – and is used by traders as a proxy for China.

Mr Felsman said the Commonwealth Bank’s forecast for the Aussie dollar was US69c by December and US71c by March 2025.

“We are in a position in Australia where we have a lower cash rate relative to the US and we are finding it difficult to get inflation under control. If Trump wins the presidency inflation could lift there, off the back of tariffs, which could complicate things for them.”

Capital.com senior financial market analyst Kyle Rodda said the US dollar weakness was the key driver now, while US election uncertainty was causing nervousness “and the Aussie dollar doesn’t respond well to that”.

“The high prospect of US rate cuts will be supportive to the Aussie,” he said.

“The China and commodities story is much more important to the Aussie dollar.” Currently this was a negative, but once the US election was over and the Chinese economy improved, Australia’s currency could head higher, Mr Rodda said.

Originally published as Interest rate decision may give the Aussie dollar’s rise another leg up