The Australian dollar ran into profit-taking on Tuesday but remained within striking distance of levels last seen in the 1980s as excitement over a possible domestic rate rise next week kept it well supported.
The Australian dollar took a dip to close at $US0.9572 from an offshore peak of $US0.9645, due in part to soft Asian stocks and a late lurch on Euro zone debt woes.
The trend remains bullish for a test of resistance at $US0.9851, a top hit in 2008 and a level last seen in 1982 before it was floated.
Aside from some banks spotted buying the currency to hedge and adjust their portfolios before the end of the month and fiscal year, there was no missing the underlying buoyant mood.
Speculation has been mounting in the market that the Reserve Bank could lift rates to 4.75 per cent as soon as next week at its policy meeting, from 4.5 per cent now.
In fact, banks are tripping over themselves to dramatically raise their Australian dollar forecasts to match the hawkish rate outlook.
ANZ was the latest bank to predict dollar could hit parity, or one-to-one, against the dollar, saying it could clinch the milestone in the next six months.
"We expect the Australian dollar to mark a short-term peak at around $US0.9850 before consolidating in the mid 90s," ANZ said.
But it too noted the Aussie dollar's stellar 7.6 per cent surge this month was also tightening monetary conditions.
"A sustained higher Australian dollar would not change our view that monetary policy needs to move to a restrictive stance. But it could mean that the end-point for the cash rate could be lower," ANZ said.
Latest market pricing showed investors saw a 64 per cent chance of a rate rise next week, and another 25-basis-point rise in the following 12 months.
The hawkish outlook, in sharp contrast to those in the United tates and Japan where more policy easing are being considered, has led to a bearish flattening of Australia's yield curve.
The cash curve was at its flattest in two years with the spread between 10- and three-year yields at 16 basis points.
But Australian bond futures managed to rise on the day as they recouped some of their recent heavy losses. Three-year bond futures rose 0.05 points to 95.10, and 10-year futures added 0.0 points at 94.91.
Reuters