Dollar surges to fresh 25-month high

DOLLAR'S two-year high means cheaper overseas trips and iPods but our travel industry won't like it.

The dollar continues to climb against the US dollar / File

THE dollar has continued its unrelenting upwards rise, surging through the 95-US-cents mark in overnight trading.

It reached 95.64 US cents during the overnight session - its highest level since the global financial crisis - but had fallen back slightly to 95.53 US cents by 7am (AEST).

At 12pm (AEST), the local unit was trading at 95.64 US cents, its highest since August 1, 2008.

The dollar has now risen an impressive 17.2 per cent since May, driven up by a strong domestic economy, weakness in the US dollar and relatively higher local interest rates. Stronger interest rates relative to the rest of the world create demand for the dollar, further pushing up its value.

HiFX senior trader Stuart Ive told AAP that the dollar pushed higher overnight after the US Federal Reserve  suggested it stood ready to further stimulate the US economy, raising fears it might print more dollars to do so.

The increased supply of money tends to cheapen its price relative to other currencies. The tactic has been used as part of the US response to the global financial crisis.

A stronger dollar brings both benefits and disadvantages for the country.

Overseas travel and imports - such as electronic goods like iPods - become cheaper as the dollar climbs in value.

The Reserve Bank does not target a particular exchange rate, but cheaper imports tend to help the inflation level stay lower.

This can help keep the underlying inflation rate within the 2 to 3 per cent target band of the central bank, reducing the need for its board to raise official interest rates.

Although, Reserve Bank governor Glenn Stevens warned this week that official interest rates were on the way up. And an ex-Reserve Bank insider predicts that five rate interest rises are on the way between now and the end of 2011.

A strong dollar can hurt businesses, particularly manufacturers, that export overseas or compete locally with imports.

It also means that our tourism industry suffers as it becomes relatively more expensive to holiday Down Under than travel overseas.

For farmers, the higher dollar is a mixed bag. It means their products become more expensive in foreign markets but reduces the costs of imported equipment.

The resources sector is relatively protected from a rising dollar as commodities like coal and iron ore are sold in US dollars. But local miners will lose when they repatriate their earnings.

There is now talk that the dollar may reach parity with the US dollar, something that has never happened since it was floated in 1983.

Its peak since the currency was floated was in July 2008, when it reached 98.5 US cents.

Data compiled by Bloomberg shows that the dollar is 27 per cent too expensive, with predictions it would weaken  6 per cent by the end of the year.

- With AAP