The Australian dollar pulled further from 14-month highs against the US dollar on Monday as investors cut long positions, although expectations that rates at home are headed up helped it hit two-month peaks on the yen.
The US dollar extended its bounce in light Asian trade, boosted by Federal Reserve Chairman Ben Bernanke's comments that monetary policy might have to be tightened as recovery took hold.
His comments led to a sell-off in Treasuries with benchmark US government bond yields rising to two-week highs on Friday.
By the local close, the Aussie dollar was at 90.26 US cents, off a 14-month high of 90.92 US cents struck on October 8.
Against the yen, the Aussie advanced to two-month highs on the yen, trading at 81.43 yen and up from 80.60 late on Friday. It was also buying 56.93 pence and 61.33 euro cents.
The yen came under pressure after a spike in U.S. Treasury yields lent support to the battered greenback.
"Regardless of some consolidation, we expect commodity currencies to extend outperformance against the US dollar during the next couple of weeks as equities continue to reflect a good start to the earning season," said Patrick Bennett, forex strategist at SocGen in Hong Kong.
The Australian dollar has a strong correlation with stock markets and both tend to move in tandem. Some of the big US companies due to report earnings this week are Intel Corp and Johnson & Johnson on Tuesday, JP Morgan Chase on Wednesday, and Goldman Sachs and IBM on Thursday.
If third-quarter earnings beat Wall Street expectations, risk appetite should remain buoyant and keep the high-yielding Aussie well supported above 90 US cents, analysts say. The Aussie has been one of the best performers among actively traded currencies, helped by carry trades, a robust local economy and a recovery in the global economy and commodity prices.
Investors are fully pricing in a 25-basis-point rate rise in November. Over the next 12 months, markets are pricing in 186 basis points of rate increases.
The Reserve Bank of Australia (RBA) became the first central bank in the G-20 to start raising interest rates when it lifted its cash rate by a quarter percentage point to 3.25 per cent last week.
That saw investors searching for higher yields pile into the Aussie as the RBA indicated further hikes. As a testament to the Aussie's growing yield allure for investors searching for better returns, the spread of Australian two-year swap yields over their US counterparts remained near 13-month highs, at 371 basis points.
Australian one-year swap yields were firm near 11-month highs, trading at 4.59 per cent.
Aussie bond futures fell further than US Treasuries. Three-year bond futures fell 0.11 points to 94.83. The 10-year contract shed 0.15 points to 94.575.
Reuters, with AAP
