SYDNEY (Dow Jones)--The Australian dollar fell to its lowest levels in three weeks on Friday as a scare surrounding debt repayments by Dubai sent shudders through regional markets. The unease is expected to continue and traders await the reaction of U.S. equities to the Dubai reports. Weaker futures markets indicate some selling will be seen early when Wall Street opens again in a shortened post-Thankgiving session. Australian government bond prices climbed to their highest levels since July as risk aversion climbed and traders lowered the probability that the Reserve Bank of Australia will raise interest rates at a policy meeting on Tuesday. At 0500 GMT, the Australian dollar was quoted at US$0.9053 compared with US$0.9222 late Thursday. Against the Japanese yen, it was trading at Y78.25 from Y79.59. Late Friday, December 30-day interbank futures were pricing in just a 42% chance of a rate hike next week. Earlier this week, the betting peaked at 74%. However, of 19 economists surveyed by Dow Jones Newswires on Friday, 18 were still expecting a 25 basis point hike next week, which would take the RBA's cash rate target to 3.75% from 3.50%. Only Stephen Roberts, chief economist at Nomura, said the RBA will stay on the sidelines on Tuesday. Dubai "may have tipped the balance" toward the RBA leaving rates on hold next week, he said. "If there is no compelling reason to change rates then the best thing is to just leave it alone," Roberts added. Richard Grace, head of currency strategy at the Commonwealth Bank of Australia, described the Dubai concerns as a "storm in a tea cup." Nevertheless, confidence remains fragile "and that is the real issue...The biggest risk is contagion of other Gulf States and for global investor confidence to become severely dented," he said. But the fundamental outlook for the Australian dollar has not changed, Grace said. Australia's relative economic health, an improving global economy and further medium-term depreciation in the USD "remains pretty much the status quo," Grace added. Sally Auld, senior debt strategist at JPMorgan, said there was room for Australian bonds to rally further if U.S. markets react adversely to the uncertainty surrounding Dubai. However, she said she expects the RBA will look through the short-term jolting of market confidence and continue to raise rates next week. Failure to hike will go against recent hawkish rhetoric by the RBA, she said. It will also sideline policy makers until February, when the RBA board is next scheduled to meet. The RBA could run the risk of falling behind the policy curve if it leaves rates unchanged, she added.

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