SYDNEY (Dow Jones)--A reappearance of risk tolerance helped the Australian dollar finish higher in Asia trade Monday after regulatory concerns last week weighed on the currency. Meanwhile, a declining fourth-quarter producer prices index in Australia had traders questioning how quickly the Reserve Bank of Australia will further tighten interest rates, propping up short-term bonds and steepening the yield curve. For each of the past three sessions leading up to Monday, the Australian dollar faced significant selling pressure. At first, the pressure came from China and concerns over possible changes to bank capital requirements in that country. From there, a possible bank regulatory overhaul in the U.S. weighed on the currency and had traders pushing into safer assets, such as the U.S. dollar, and away from riskier ones like the Australian currency. For at least one day, however, some of that momentum was stunted with John Horner, head of foreign exchange strategy for Deutsche Bank, attributing the strength in the local currency to a bounce in U.S. equity futures on news reports Federal Reserve Chairman Ben Bernanke is likely to get reappointed. "It's not technical factors, just watching the news flow at this point with the Bernanke news helping risky currencies more generally," said Horner. At 0515 GMT, the Australian dollar was quoted at US$0.9065, up from US$0.9028 late Friday. Against the Japanese yen, it was at Y81.66, up from Y81.23. Still, Horner cautioned that with a holiday set for Tuesday in Australia, volume was light with traders mostly focused on a series of data points and news due out later in the week. Among the areas he's focused on are policy meetings from the Bank of Japan and U.S. Federal Open Market Committee, as well as U.S. gross domestic product figures. Even while risk tolerance was prevalent in the currency market, short-dated bonds strengthened, steepening the yield curve as a result. ANZ Strategist Tony Morriss said the steepening curve stemmed from the lower-than-expected Australian PPI figure ahead of Wednesday's consumer prices index data. If CPI were also to come in lower, market participants would cool their pricing for expected rate hikes in coming months. However, the RBA is expected to hike at next week's meeting, with the consensus being a 25 basis point increase, which would take the cash rate to 4.00%. So, even while risk tolerance was helping currencies, the opposite was propping up short-dated bonds. "The (PPI) data is specifically geared towards expectations solely related to the RBA, whereas the Aussie is subject to a lot of other shifts," said Morriss. "And that the PPI data was weaker than the market expected propelled the front end of the curve." In recent trading, the 3-year bond rose two ticks to 95, while the 10-year fell 4.5 ticks to 94.455. --By Geoffrey Rogow, Dow Jones Newswires; 61-2-8272-4686; geoffrey.rogow@dowjones.com

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