The Australian dollar has been a surprise outperformer this year, but the still "cheap" currency is unlikely to rise to levels that would worry the Reserve Bank, analysts say.
The Aussie hit a one-month peak of US75.19¢ on Thursday, boosted by a surprise bout of weakness in the greenback as well as ongoing strength in commodity prices. On Monday at 0600 AEDT, it is fetching 74.98 US cents.
It has risen more than 4 per cent in 2017, more than any other major currency against the greenback, which was hobbled last week by disappointment that President-elect Donald Trump didn't present any details about his much anticipated fiscal stimulus plans at his first news conference since his election.
Meanwhile, the price of iron ore, Australia's No.1 export item, burst back above $US80 a tonne, ending the week at $US80.54. Firmer iron ore prices lead to a faster improvement in Australia's terms of trade, lifting the fundamental value of the Aussie.
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But lingering doubts around the sustainability of the iron ore price rally were one reason why the currency was still "cheap" when compared to its estimated fair value of close to US78¢, Westpac senior commodity analyst Sean Callow said.
While his colleagues at ANZ are predicting the currency will retain its momentum and head towards US80¢ in the near term, Mr Callow is more cautious, seeing US76¢ as a realistic target.
"To get to US80¢ you'd need another broad-based US dollar sell-off, but that seems a long way off at the moment," he said, pointing to a number of speed bumps apart from commodity price scepticism.
"With every indication that Trump is serious about taking strong protectionist action against China, the Aussie will remain at risk of becoming collateral damage of a US-China trade war over the course of 2017," he said. "It is difficult to see the Aussie spending much time above US75¢, especially with US dollar downside ultimately limited by Fed tightening expectations in the months ahead."
That would keep it well below levels where it might start to cause a headache for the RBA, which has warned that "an appreciating exchange rate could complicate" the economy's transition from mining to services-led growth.
"They would be concerned if the Aussie rose to US80¢ without another leg up in commodities prices," Mr Callow said.
Other economists also reckon that the Aussie dollar's moment in the sun might be limited.
Deutsche strategist Tim Baker acknowledges that high commodity prices are supportive but points out that the local dollar has frequently ignored extreme moves to the upside, adding that other indicators point to weakness.
Shrinking rate differentials between Australian and US bond yields as well as the future path of interest rates both suggested downside, he said.
"We were upbeat on Australian dollar prospects in 2016, but became bearish in late November, and expect the Aussie to sink below US70¢ in 2017."
That puts him among the more bearish analysts – the median forecast for the Aussie this year is to fall to just US72¢, according to Bloomberg.