The Australian dollar is once again caught up in the shifting tide of global finance, with the currency pushing to two-and-a-half year highs and threatening to further delay the RBA's tentative plans to move towards a more normal monetary policy setting.
The Aussie has lifted by more than US6?? since early December - or 8 per cent - to push firmly above US81??, its loftiest level since May 2015. That brings its gains in 2017 to 3.9 per cent against the greenback, or around US3??.
"For Europe, Japan and Australia the lower US dollar is a de-facto monetary tightening which could further delay eventual rate hikes," AMP Capital chief economist Shane Oliver said.
While a string of positive local economic data this year has played its part in firming demand for the Aussie, a surprisingly weak greenback has been key to the local currency's surprising strength in recent weeks, analysts say. Higher commodity prices as a result of the weaker US dollar have also added further impetus to Aussie strength.
The Bloomberg US dollar index, which measures the currency against a trade-weighted basket of its peers, is down by more than 3 per cent in 2018. That puts it in the midst of its worst January since 1987, and its second worst January back to 1968, Westpac global head of market strategy Robert Rennie calculates.
Many economists now believe the current trend of weakness for the greenback looks to be stretched and liable to a near-term reversal. But this year's losses have extended a 10 per cent fall in 2017, which leads Mr Rennie to warn that such an extended period of falls means "weakness [in the US dollar] is becoming entrenched".
Heading into this year, economists had been predicting that higher US rates would push yields higher and increase the attractiveness of the greenback, particularly as an already robust economy stands to receive another boost from President Donald Trump's corporate tax cut.
Instead it has been other major economies - particularly in Europe - which have stolen the greenback's thunder as rapidly improving economic conditions have fuelled expectations of a move away from extremely loose monetary policy conditions, including a potential for an end to quantitative easing. Accordingly, the euro has jumped 5.6 per cent against the US dollar since early December, and last fetched $US1.24.
"While the Fed is well underway into its tightening cycle, all other major central banks are just joining the tightening bandwagon," ANZ head of FX strategy Daniel Been said. "This means the US dollar is less sensitive to interest rate dynamics."
Little is expected from the US Federal Reserve's monetary policy meeting this week, with economists leaning towards a March rate hike.
Even as overseas developments have largely driven the Aussie's recent climb, the release of key inflation data on Wednesday has the potential to refocus attention on domestic matters.
The consensus forecast among economists is for headline consumer price inflation over the December quarter to lift to 0.7 per cent, from 0.6 per cent in the prior quarter. That would take annual inflation to 2 per cent from 1.8 per cent.
The RBA's preferred measures of annual core inflation are expected to lift to 1.9 per cent from 1.8 per cent - still just below the 2-3 per cent target range targeted by the central bank. Such an outcome would be "unlikely to change the RBA's view on the path of core inflation moving gradually toward 2 per cent," NAB economists said.
Economists also warn that the appreciation of the local currency has the potential to weigh on consumer price inflation as imported goods become cheaper.
Australia's trade-weighted dollar index has lifted by a more modest 3.3 per cent since early December when the RBA last met, and Citi economists predict a further 2.5 per cent lift this year. That could shave as much as half a percentage point off annual inflation in the coming years, Citi chief economist Paul Brennan said.
"Admittedly this is small reduction, but underlying inflation remains below the bottom of the RBA's target band," Mr Brennan said. "What is needed are upside inflation surprises, not the potential for further moderation in tradeables inflation."
The RBA at its December meeting noted that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast", and a desire to not add to further upward pressure on the currency was a contributing factor to why Mr Brennan believes the central bank "probably won't begin to normalise rates until late this year".
While economists expect CPI figures to print in line with the RBA's forecasts, the risk of a sharp move lower following a lower than expected result is greater than the reverse, ANZ's Mr Been warned.
"At current levels the Aussie looks more vulnerable to disappointments rather than to a strong result," Mr Been said. "Ongoing strength in risk sentiment, however, along with a generally positive domestic macro backdrop, mean downsides are limited for the Aussie."
"With the Fed at risk of getting more hawkish, other central banks remaining relatively dovish and Trump actually advocating a strong dollar, we may be close to seeing an upturn in the US dollar or at the very least further downside in the dollar is likely to be limited," Mr Oliver said.
Longer term, the view on the Aussie remains mixed. For example, Westpac economists see the currency around US9?? lower by the end of the year, while Citi analysts see it largely unchanged.