The Australian dollar held firm on Friday, underpinned by surprisingly strong Chinese manufacturing data and intense speculation domestic interest rates will resume their ascent next week.
At the local close, the dollar was trading at $US0.9673, below yesterday's close at $US0.9682, but up from an early $US0.9637 low and not far from a two-year high of $US0.9734 struck overnight. It has gained 1 per cent for the week after rising over 8 per cent for all of September.
The Aussie also hit its highest level on sterling since 1985 around 0.6170 pounds.
Helping was the closely watched China PMI index which rose to 53.8 in September, handily beating forecasts of 52.0 and quashing worries the economy might slow too far.
China is a major buyer of Australian commodities, and a major determinant of prices, so signs of a revival in production as considered positive for exports and domestic growth.
A soft landing for China would also brighten the outlook for growth globally and improve the appetite for leveraged trades in commodities and higher yielding currencies.
That is one reason the Reserve Bank of Australia (RBA) could chose to lift interest rates at its policy meeting next week, ending a four-month pause.
The outlook for tightening contrasts markedly with the US Federal Reserve, Bank of Japan and Bank of England, which are all considering extending quantitative easing.
"The RBA is looking out to 2011 and 2012 and sees a mining investment boom here fuelled by Chinese demand," said Rob Henderson, chief markets economist at National Australia Bank.
"That boom is coming when the economy is already near full capacity, so rates have to rise to head off inflation."
He expects the cash rate to rise 25 basis points to 4.75 per cent on Tuesday, and most of his peers agree. A Reuters poll of 23 economists found fully 18 expected a hike with five for no change.
Investors, however, were more circumspect with their wagers. Interbank futures and the Credit Suisse measure show around a 50 per cent probability of a move.
Australian bond futures were also weaker, with three-year bond futures down 0.06 points at 95.11 while 10-year futures dropped 0.075 points to 94.93.
Reuters