Aussie dollar: Talk of RBA interest rate hike might help make your next holiday cheaper

Australian travellers are likely to get a boost as a widening split between the Reserve Bank and US Fed should push the local currency higher.

Markets are tipping the RBA will raise interest rates once before the middle of 2026 in response to rebounding inflation and amid tough-talking comments from Governor Michele Bullock.

Yet America’s Federal Reserve last week lowered the official interest rate in the world’s largest economy by 25 points to a band of 3.5 per cent to 3.75 per cent.

The divergence between the two central banks would be expected to drive the Australian dollar higher, as overseas investors seek better returns in the country with a higher interest rate.

Investment bank UBS on Monday said the Australian dollar had lifted by 10 to 40 per cent in three similar historic cases.

That would mean Australians hoping to head overseas next year would have higher purchasing power.

“The Australian economy is outperforming or stronger than the United States across the key macrovariables of GDP, inflation, and the labour market,” UBS economist George Tharenou said in a note.

He said UBS predicted the RBA would “hike the cash rate at the same time the Fed is still cutting”.

Yet Mr Tharenou said the exchange rate had not moved upwards as quickly as would be expected.

Two other key factors aiding the case for a higher dollar were strong commodity prices and the Federal Government’s budget deficit, which is being paid for partly by offshore lenders.

There would also be a headwind from superannuation funds pumping more cash overseas, he said.

AMP’s Shane Oliver over the weekend tipped the Australian dollar’s fair value would be about US7¢ higher.

“The dollar is likely to rise as the interest rate differential in favour of Australia widens as the Fed cuts and the RBA holds and possibly hikes.” he said.

“Fair value for the Australian dollar is around US73¢.”

That compares to about US66¢ on Monday morning.

A higher exchange rate would tend to modestly reduce import prices such as fuel and electronics, but make life harder for Aussie businesses trying to compete with traded goods.