The rocketing Australian dollar has re-ignited debate over the likely direction of Australian interest rates, with economists expecting the RBA to continue to sit tight.
After bursting through US78¢ last week, the Aussie was trading slightly weaker on Monday afternoon US78.06¢. However, it's up 8.5 per cent against the US dollar so far this year and 6 per cent since the start of June.
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In contrast the US dollar index, which tracks the greenback against a basket of trade-weighted peers, hit a 10-month low early on Monday.
The greenback has now given back all of the gains and more it made since the US presidential election last November. That's despite four US rate hikes and significant hawkish signals coming out of the US Federal Reserve.
![The local currency was fetching US78.26¢ and the dollar index, which tracks the greenback against a basket of ...](http://web.archive.org./web/20170719135152im_/https://www.fairfaxstatic.com.au/content/dam/images/g/u/p/l/b/7/image.related.articleLeadwide.620x349.gxcj85.png/1500281841949.jpg)
The US dollar fell again on Friday after US retail sales declined, contrary to expectations, while the US monthly inflation print came in at zero, with annual consumer price inflation at 1.6 per cent.
The weakness in the US dollar is having a knock-on effect to the Australian dollar, which has now broken out of the tight trading band it hovered at for several months, of just below US77¢.
The move in the Aussie is likely to be of concern for the Australian central bank, which has been cutting interest rates for the past few years and has seen the Australian dollar move back from mining-boom highs.
"Extraordinarily low global interest rates have meant that a low cash rate was needed to keep the Australian dollar down to rebalance growth," said Paul Bloxham, chief economist at HSBC Australia.
Lower interest rates tend to result in a weaker currency and vice versa, although the relationship between interest rates and currency moves became muddied after the financial crisis when global central banks cut interest rates to ultra low levels around the world.
Given the US dollar's role as reserve currency of the world, its losses are likely to overshadow any acts by the RBA to curb the strength of the Aussie.
"The Reserve Bank of Australia will certainly be watching the Aussie, but I don't think it's gotten to a stage where they are likely to cut rates again," said Robert Rennie, chief currency strategist at Westpac.
With the Australian dollar above US78¢, Westpac says it is at the top of the bank's fair value range. Should the currency rise above US79¢, it will be categorised "stretched" or "expensive" to fair value.
Some economists expect the RBA to begin tightening the cash rate, with the slowdown in the mining boom reaching a point of stability and global interest rates heading north.
"We doubt the RBA will need its very accommodative setting for much longer," says HSBC's Mr Bloxham. "Besides, the low cash rate is also causing unwanted exuberance in the Sydney and Melbourne housing markets."
Nonetheless, the market seems reluctant to price in RBA hikes over the next 12 months. The market is currently pricing that the RBA is unlikely to lift its cash rate until mid-to-late 2018, with overseas international swap rates 50:50 priced for a 25-basis-point hike by May 2018.