ANZ foreign exchange researcher explains why Aussies will enjoy cheaper overseas holidays next year

It looks like overseas holidays will be cheaper next year as US interest rate cuts boost the Australian dollar.

The local currency fell below 63 US cents for the first time in a year in early October, but has since risen to 68 US cents for the first time since February.

The Australian dollar has gained strength after US Federal Reserve Chairman Jerome Powell declared this month that US rate hikes were over.

Mahjabeen Zaman, head of ANZ's foreign exchange research, predicted the Australian dollar would reach 70 US cents by the end of 2024, making travel to the United States cheaper.

“We predict an advantage for the Australian,” she told Daily Mail Australia.

“The Australian dollar has been severely undervalued over the past year and this year and we believe the move is likely to be only upwards.

“We're not looking at the mid-1970s or anything like that; we think the 1970s are likely to be a short run for the Australian.

'It will become cheaper to go abroad.'

The gap between US and Australian interest rates is expected to narrow by the end of 2024, which would support the Australian dollar.

The US Federal Funds rate of 5.25 to 5.5 percent is significantly higher than the Reserve Bank of Australia's 12-year high rate of 4.35 percent.

But Ms Zaman predicted US yields would fall by the end of September next year, while the RBA waited until December 2024 to ease monetary policy for the first time since 2020.

“We are calling for USD weakness as they are going to cut rates before the RBA,” she said.

'We believe the RBA will be one of the last central banks to start cutting rates, so we anticipate the RBA's first cut until the end of 2024.

“Depending on how much the Fed goes, the interest rate differential will also narrow, which will be good for the Australian.”

But before the US even cuts rates, the US dollar has already been weakening since Mr Powell warned on December 14 that it was too early to rule out a recession, signaling to markets that there would be no more interest rate increases.

“After this month's Fed meeting, we've seen the dollar depreciate quite a bit,” Zaman said.

As a result, the Australian dollar has risen from 66 US cents to 68 US cents from Friday.

“The next move lower for the USD will be when we see more inflation numbers. “If the trend for US inflation is downward, if it continues, that will continue to support a weaker US,” Ms Zaman said.

US inflation was just 3.2 percent in October, compared to the Australian level of 4.9 percent.

The Australian dollar has gained momentum after US Federal Reserve Chairman Jerome Powell declared this month that US interest rate hikes were over (photo is Rodeo Drive in Beverly Hills).

ANZ head of currency research Mahjabeen Zaman (pictured) predicted the Australian dollar would reach 70 US cents by the end of 2024, making travel to the United States cheaper.

The Australian Consumer Price Index for the September quarter was still high at 5.4 percent and the Reserve Bank would be concerned if the December quarter figure, due at the end of January, did not show that price pressures are easing quickly enough.

The RBA does not expect inflation to fall back to the top of the two to three percent target range until late 2025, which could delay interest rate cuts in Australia as the US eases monetary policy.

“Services inflation still remains quite high,” Ms Zaman said.

“It's actually demand-driven, so people keep spending and driving up services inflation. That has to go before inflation really moves towards its target.'

Iron ore prices are also at an 18-month high of $139 per tonne, but the difference between US and Australian interest rates is still a bigger driver of the Australian dollar than commodity prices.

“In recent years, the correlation between higher iron ore prices and the Australian dollar has not been as strong as interest rate differentials, inflation differentials or even risk sentiment,” Ms Zaman said.

The Australian dollar also traditionally does well when global stock markets rise, as currency traders view the dollar as a risk-driven unit.

“Generally speaking, when global stock markets rise, you see the Aussie rise too and that's what we're seeing now,” she said.

The US Federal Funds rate of 5.25 to 5.5 percent is significantly higher than the Reserve Bank of Australia's 12-year high rate of 4.35 percent. But Ms Zaman predicted that US interest rates would fall by the end of September next year, while the RBA waited until December 2024 to ease monetary policy for the first time since 2020 (pictured is a US $100 banknote with the imprint of founding father Benjamin Franklin)

A stronger Australian dollar could help motorists who paid more than $2 a liter for unleaded petrol this year.

But items such as cars and electronic goods are unlikely to be significantly cheaper, with the Australian dollar improving slightly to 70 US cents.

Ms Zaman said better deals in 2024 were more likely to be a productive solution to Covid supply shocks finally being resolved.

“That takes time and that should work out better for us,” she said.

“The Australian going from 68 to 70, that's not going to make any meaningful change for you and me if we buy a car or a TV.”