Dollar rises as RBA drops easing bias

The Australian dollar set a high for the year on Tuesday for the third day in a row as the RBA dropped its easing bias, suggesting rates could rise here well before the rest of the developed world.

The Reserve Bank of Australia left interest rates unchanged at 3 per cent, but closed the door on the chance of further easing in an expression of confidence on the economy at home and abroad.

Yet it also said low rates were appropriate, curbing the most extreme speculation in the market that it might tighten by year-end or even earlier.

The Aussie had risen a cent to as far as $US0.8471 before the announcement, but drifted off to $US0.8422 after as the statement was not as hawkish as some had wagered on.

At the close of local trade, the dollar was buying $US0.8433, up form yesterday's close of $US0.8357.

"The market was quite long going into the RBA so it kind of dribbled off after that," said Matthew Brady, a trader at JPMorgan.

Against the yen, the Aussie rose to as far as 80.61 yen, before pulling back to 80.12.

Brady said the recent spurt in the Aussie, which has jumped over 7 per cent from a low of $US0.77 in the last three weeks, may have legs to run further as fund managers were still buying the local dollar.

He said option levels are seen at $US0.8475 and $US0.8500, which meant the Aussie could bounce sharply if these levels are breached. Option levels on the downside around $US0.8380, then $US0.8340 will prove to be firm support levels.

Bill and bond futures were down again, though they did pare losses as investors rowed back a little on the chance of early and sizable rate hikes.

December bill futures lost 0.13 points to 96.26, while three-year bond futures fell 0.12 points to
94.93.

Ten-year bond futures eased 0.035 points to 94.38.

Expectations of rising local rates have seen Australia's yield curve undergo a bear flattening. The spread of 10-year government cash bonds over their three-year counterparts narrowed to 79 basis points on Tuesday, the lowest since December.

Some economists said investors were too aggressive in pricing in rate hikes by Christmas, since the outlook to the world economy remained uncertain.

"Given that the RBA still sees "sluggish" domestic output near-term and a "modest" global recovery ... we continue to expect the RBA to hold rates steady until at least second-half 2010," said UBS in a research note.

Implied money market rates show investors are pricing in rate hikes of 152 basis points over the next year.

If the RBA does indeed eventually raise rates, it would likely be the first central bank in the developed world to do so, and that would further boost the Aussie's yield allure.