Aussie Dollar hits a three-year high thanks to threat of RBA interest rate hike and US President Donald Trump

The threat of rising interest rates will have an upside for hopeful holiday-makers after the Australian dollar soared to a three-year high close to US71¢.

Australia’s exchange rate has lifted more than US10¢ since the low point of American President Donald Trump’s trade war in April last year. It’s also up against the Japanese Yen, British Pound Sterling and Europe’s Euro in recent months.

Yet as battlers worry about the rising cost of living and a looming mortgage blow, the stronger currency will provide a little relief by lowering costs for imported goods including clothing, cars and electronics.

Families feeling affluent enough to head overseas would also expect cheaper travel as the exchange rate strengthens.

The Aussie dollar’s surge has been driven by worries that the Reserve Bank will raise interest rates, solid commodity prices, and chaotic decision-making by Mr Trump that has damaged the credibility of America’s currency.

“The Aussie’s having a good run,” Commonwealth Bank head of international economics Joseph Capurso said.

He said a US4¢ increase in January alone was “quite a bit in a one month period”.

The country’s big four banks — including Commonwealth — are tipping an interest rate rise as soon as next week, although financial markets still show a one-in-three chance the cash rate will stay on hold for a little longer.

Higher interest rates will tend to attract foreign investors into the country and will strengthen the dollar. That’s driven plenty of action this week with Bloomberg reporting hedge funds have been hoovering up Aussie dollars in anticipation for further increases.

But Mr Capurso said the biggest factor was America, with the US dollar “worse against all currencies”.

Mr Trump has been on the war path urging Federal Reserve Chairman Jerome Powell to cut interest rates in the world’s biggest economy despite inflation remaining stubbornly above target.

His administration also threatened a criminal indictment over Mr Powell’s Senate testimony over building renovation works, sparking investor worries that Mr Trump was seeking to strong-arm the central bank.

“Attacking the independence of the Federal Reserve will certainly not be helping the US dollar,” Mr Capurso said.

It has helped the price of gold, however, with investors flocking to an asset usually seen as a safe haven and sending the precious metal’s price up close to 10 per cent over just two days, hitting $US5500 an ounce on Thursday.

Mr Trump and Treasury Secretary Scott Bessent have also sent conflicting messages about the US Government’s policy on the dollar, adding to uncertainty.

The Fed on Wednesday night kept its interest rate on hold in the 3.5 to 3.75 per cent range — roughly similar to the RBA’s 3.6 per cent — amid concerns about elevated inflation.

Closer to home, a rising dollar will frustrate local exporters, which will become less competitive globally, and dent Treasurer Rita Saffioti’s budget.

The exchange rate is more than US6¢ higher than predicted in the May State Budget, which would reduce royalty revenue by about $800 million a year.