A weak US dollar after a downside surprise in economic data has propelled the Australian dollar to a two-year high, topping 78 US cents for the first time since June 2015.
The local currency was at 78.19 US cents shortly after midday on Monday, up from 77.49 US cents on Friday.
BetaShares Capital chief economist David Bassanese said the surge came on the back of US Consumer Price Index data, which made the market less confident of further Federal Reserve rate rises.
"The CPI numbers on Friday are definitely having a flow through effect," Mr Bassanese told AAP on Monday.
"Inflation has surprised on the downside for a few months now, so further confirmation of that is putting the pressure on the Fed to basically not raise interest rates this year."
US CPI remained unchanged in June after falling 0.1 per cent the previous month and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter.
Mr Bassanese said US Fed chief Janet Yellen's comments earlier last week that rate hikes could be gradual due to persistently low inflation was also a big mover for the Aussie dollar.
"Inflation has surprised on the down side in the last few months and markets are starting to factor in the risk that the fed could actually be under pressure not to raise interest rates," he said.
He said that, plus Australian sentiment that the Reserve Bank of Australia could in fact raise interest rates and follow a more hawkish global lead, pushed the dollar up.
However, Mr Bassanese believes while the RBA will be annoyed by the Aussie dollar's climb, it will keep the cash rate at a record low of 1.5 per cent for a while yet.
"The economy at the moment looks OK, but down the track challenges are only going to mount," he said.
"Given the recent surge in the Aussie dollar, the RBA seems even less likely to want to hint at higher rates anytime soon."
He said that, if US inflation fails to rebound and the Fed says it will not raise rates this year, the Aussie dollar could soar even higher.
"If you get that confirmation from the Fed, then the Aussie could easily hit 80 cents," he said.
But not all economists have faith that the Aussie dollar will continue to climb, with HSBC's chief economist Paul Bloxham expecting the local currency to shrink back to 75 US cents by the end of the year.
"We expect the Federal Reserve to lift its policy rate further later this year and to begin to reduce its balance sheet, both of which should strengthen the USD relative to the AUD," Mr Bloxham said.
"We also expect iron ore and coal prices to edge lower, which should put some downward pressure on the AUD."
