Dollar rises as RBA drops easing bias

The Australian dollar was set high for the year on Tuesday for a third day as the RBA reduced its easing bias, suggesting rates could go up here long before the rest of the developed world.

The Reserve Bank of Australia left interest rates unchanged at 3 percent, but closed the door on the possibility of further reducing an expression of confidence in the economy at home and abroad.

However, he also said that low rates were appropriate, curbing the most extreme speculation in the market that could strengthen later this year or earlier.

The Australian was up one cent to as much as $ US0.8471 before the announcement, but stems versus $ US0.8422 after the state was not as hawkish as some had bet on.

At the close of local trading, the dollar was buying $ US0.8433, to the way yesterday's close of $ US0.8357.

"The market was very long into the RBA for what kind of dribbled off after that," said Matthew Brady, a trader at JPMorgan.

Against the yen, the Aussie rose to as much as ¥ 80.61, before easing to 80.12.

Brady said the recent surge in the Australian, who has more than 7 percent from a low of $ US0.77 in the last three weeks, may have more legs to run as fund managers continue to buy local dollar.

He said the levels of choice is at $ US0.8475 and $ US0.8500, which meant the Australian could rebound sharply if these levels are not met. Option levels down around $ US0.8380, then $ US0.8340 prove to be strong support levels.

Bill and bond futures fell again, but do not stop losses on investors rowed back slightly on the possibility of raising interest rates early and sizeable.

The future of the bill in December lost 0.13 point to 96.26, while three year bond futures fell 0.12 to
94.93.

Futures ten-year bond fell 0.035 points to 94.38.

Expectations of increased local taxes have been the yield curve in Australia undergo a bear flattening. The dissemination of government bonds to 10 years in cash during its three counterparts of the year fell to 79 basis points on Tuesday, the lowest since December.

Some economists said that investors were too aggressive in pricing in rate hikes for Christmas, as the prospects for the global economy remains uncertain.

"Given that the RBA is still" sluggish "domestic production in the short term and a" modest "global recovery ... We still expect the RBA to hold rates steady at least until the second half of 2010," UBS said in a research note.

The implied money market rates show investors the price increases of 152 basis points over the next year.

If the RBA indeed eventually raise rates, it is likely that the central bank first in the developed world to do so and that would further boost to the Aussie charm.