Why the Aussie dollar is soaring in value – and why it’s good news for those planning an overseas trip

For anyone planning a trip to the US in the coming months, the sudden and substantial rise in the Australian dollar will be welcome news.

Against the US dollar, our currency added almost 5 percent in November, its largest monthly gain in 2023, to buy about 66.20 US cents.

On Tuesday, the Australian dollar hit its highest level since late July, briefly reaching US67c in offshore trading before easing further.

While local factors play a role in the Australian currency's recent appreciation, the main reason for the dollar's jump can be attributed to the dollar's decline, rather than domestic conditions.

Measuring the U.S. dollar against a basket of foreign currencies weighted by trade partnership, the dollar has fallen more than 3 percent this month and is at its lowest level in three months.

The Australian dollar saw its biggest monthly gain against the greenback in November 2023

The measure, known as the DXY, fell half a percent on Tuesday as Federal Reserve Governor Christopher Waller added his voice to the growing number of policymakers who appear increasingly comfortable with the path the Fed has taken .

The US has made great progress in curbing price pressures. While US inflation peaked at 9.1 percent in June last year, it has fallen to just 3.2 percent in October and appears on track to meet the Fed's 2 percent target.

Mr Waller, who has clearly been on the “hawkish” side of the spectrum on the Fed's board – meaning he has regularly voted for a rate hike – said further rate hikes would make no sense if prices continue to fall.

“I am increasingly confident that policy is currently well positioned to slow the economy and bring inflation back to 2 percent,” Waller said.

“I'm encouraged by what we've learned in recent weeks: Something seems to be giving, and that's the pace of the economy.”

Mr Waller added that if inflation continues to fall, there could be room to cut rates within three to five months.

The futures markets now show that interest rate cuts will be priced in as early as May next year.

At home, our inflation story is quite different.

Locally, our Reserve Bank still signals a chance of further interest rate increases in the coming months. While money markets are pricing in a 5 percent chance of a rate hike when the central bank meets on December 5, there is still a two-in-five chance that rates will be tightened further in March.

Just as importantly, investors don't expect interest rate cuts until September 2024.

The RBA added a further 25 basis points to the official cash rate in November, while the Fed has not raised rates since July.

It is this difference in interest rate prospects between Australia and the US that is making our local currency more attractive, increasing demand and driving up its value.

Commodity prices explosive

Rising prices for Australian commodity exports have also helped push the Australian dollar higher.

The dollar, popularly known as the 'commodity currency', is being held up by soaring export prices

In hopes of a new round of stimulus from Beijing to revive the troubled Chinese economy, iron ore prices are at record highs of $130 per tonne.

Higher prices for our commodity exports mean more Australian dollars are needed to buy the same amount of them, increasing demand and increasing the value of the local currency.

And with analysts predicting that iron ore could rise towards $150 per tonne in the new year, the impact on the dollar could only become stronger.

What does a strong Australian dollar mean for us?

For Australians who don't fly to the US, the strong Australian dollar will reduce the cost of goods and services brought in from overseas.

As households face painful pressures as their real incomes are squeezed, lower import prices will bring much-needed relief into their pockets.

A stronger dollar also means that consumer goods will likely be cheaper to import

Similarly, companies that rely on imports from abroad will also face lower costs to purchase products.

But it's not all good news.

For Australian businesses that export or sell their goods and services overseas, the news isn't great. The strong exchange rate poses challenges as it reduces their competitive advantage, making it more difficult to price their products competitively in foreign markets.

In addition, companies may receive their earnings in weaker foreign currencies, reducing their revenues.