The Australian dollar huddled in a tight range Friday having snapped back from 15-month highs after a wave of profit-taking hit risky assets across the board.
The dollar ended a quiet local session at $US0.9257, having shed over a cent from Thursday's peak of $US0.9370.
Some traders noted the Aussie suffered a bearish outside trading day on Thursday, signalling possible further weakness from here that may push it to $US0.9210 or lower in the near term.
"Risk appetite appeared to be reaching saturation," said Patrick Bennett, a Societe Generale analyst in Hong Kong.
The Aussie slid on the yen to 83.53, from Thursday's 83.96. Against the euro, the local dollar edged lower to 0.6226 euros, off an over 20-month high of 0.6242 hit on Thursday.
In the longer term however, many analysts and traders are confident the local dollar could climb higher.
Charts show the dollar has upheld an upward trend channel for a notable eight months. Rising local interest rates, a weak US dollar and record gold prices will all work in the Aussie's favour, they say.
Reuters data shows the Aussie will benefit greatly from a weak US dollar, with the monthly logarithmic correlation between the two at -0.97.
With gold prices, Reuters data shows the Aussie has a firm correlation of around 0.77, with Barclays Capital saying this week Aussie's correlation with gold is near historical records. This could further boost demand for the Aussie's in coming months as central banks and investors diversify their investments to reduce cut their holdings of US dollars and protect themselves against inflation.
"The Aussie, like gold, is a good hedge against inflation," Barclays said.
For now, all eyes are on the Reserve Bank of Australia's (RBA) December 1 policy meeting, when investors are almost certain it will raise interest rates by 25 basis points to 3.75 per cent, as part of a policy tightening campaign running through 2010.
The RBA's minutes for its November policy meeting, due on November 17, may shed light on the probability of a move.
As a testament to the Aussie's high-yield allure, the spread of Australian two-year swap rates over US peers hit a 16-month high of 420 basis points. Aussie bond futures rose, recovering from Thursday's declines. The three-year contract was up 0.04 points at 94.87. Ten-year bond futures added 0.02 points to 94.42.
