The Aussie dollar was broadly firmer on Wednesday, supported by growing optimism over commodity prices but failed to hold on to all of its gains against a rallying US dollar.
The dollar was hovering at $US0.8904, up from $US0.8777 late Tuesday but off a high of $US0.8993. It had spiked higher overnight after breaks of resistance levels at $US0.8884 and $US0.8911 triggered a bout of short-covering in an illiquid market.
Traders saw support at $US0.8890, the 100-day moving average, and that needs to hold for a push on to $US0.9015.
Part of the currency's gains were attributed to talk that strong Asian demand for coal and iron ore, Australia's two biggest export earners, will lead to larger than expected price rises next year.
"Coal prices have showed some strong gains in recent weeks and Japanese companies look to be settling on contracts with solid rises," said Robert Rennie, chief currency strategist at Westpac.
Dow Jones Newswires reported on Tuesday that Japan's Tokyo Power had agreed to pay $US85 a tonne for thermal coal, well above the previous benchmark of $US70-72 tonne. Coal exporters are now hoping for prices around $US90 for 2010.
"I don't think market is really seeing this angle on coal and iron ore at the moment, and it could be quite explosive in my view," added Rennie. "So we start 2010 on a good note for the A$, and would not be surprised to see a solid push higher - it's just a matter of time."
The Aussie gained on a generally soft yen at 82.07, breaking resistance at 82.0 to reach its highest in three weeks.
The yen was dragged down by a warning from S&P that Japan's debt rating could be in danger if it did not enact major fiscal reform to stabilise and reduce its debt burden over the medium term.
The euro has also been suffering from concerns over rising debt levels at some euro countries, with the European Commission warning that public finances in half of the 16 euro-zone nations are at high risk of becoming unsustainable.
That was one reason cited for a sharp decline in the euro on Tuesday which pulled the Aussie up to 0.6229 euro, from 0.6170.
The local currency was further underpinned by a steep rise in bond yields in recent days, which saw the Australian 10-year yield touch a six month high of 5.87 per cent on Tuesday.
The move echoed a big run-up in US Treasury yields which in turn reflected optimism about a US economic recovery.
US yields pulled back a little late Tuesday after reasonable demand for an auction of five-year paper. The 10-year yield edged off to 3.80 per cent, after spiking to a four-month peak of 3.87 per cent early in the session.
That helped local bond futures steady after a vicious sell-off on Tuesday. Aussie three-year bond futures gained 0.040 points to 94.880, while the 10-year rose 0.055 points to 94.200.
