SYDNEY (Dow Jones)--The Australian dollar rallied to 10-week highs Friday as global markets welcomed news of a comprehensive package of measures in Europe to deal with Greece's chronic debt problems.
"While the EU sovereign debt crisis is still far from resolved, the package of measures announced by the EU leaders is a major step-up in their determination to return to financial stability," said Stephen Halmarick, head of Investment Markets Research at Colonial First State.
Global bond yields fell on the statements from the European Union as risk assets were again targeted by investors, and many local traders said the Australian dollar is on track to test its post-float highs of US$1.1012.
"The tone has well and truly changed as the market has priced out the worst-case scenario," said Grant Turley, senior currency strategist at ANZ Bank. "We think the bullish theme surrounding the Australian dollar is just about to reassert itself."
At 0630 GMT, the Australian dollar was at US$1.0841, up from US$1.0730 late Thursday. Against the Japanese yen, the Australian dollar was at Y85.16, up from Y84.55.
Richard Grace, head of currency strategy at Commonwealth Bank of Australia, said the U.S. dollar is set to remain weak over time, which will help to drive the Australian dollar higher.
"The real risk is that a U.S. interest rate hike just keeps getting pushed back," Grace said.
With the global response to the action on Greece positive, risk assets such as the Australian dollar are set to play some catch-up in coming weeks, he added.
The easing in global sovereign debt fears is likely to see some of the local expectations of an interest rate cut evaporate over coming weeks, Grace added. Financial markets have been pricing two cuts in rates over the next year.
Better news also emerged in the U.S. over talks to resolve the impasse over an increase in the U.S. debt ceiling.
According to a report in the Wall Street Journal, U.S. President Barack Obama and House Speaker John Boehner are moving toward a deficit-reduction deal that could cut as much as US $3 trillion in spending and overhaul the tax system by the end of next year to raise up to $1 trillion.
Locally, second quarter inflation data next Wednesday are likely to be a flash point for the financial markets.
A survey of 18 economists by Dow Jones Newswires showed an expected rise in core inflation of 0.7% in the second quarter from the first.
Economists don't expect such a result to be a trigger for a near-term interest rate increase, but the data will nonetheless remind markets that there is an underlying inflation problem.
"That said, only a very high (core inflation) outcome of say above 1% could seriously put a near-term rate rise back on the agenda," said Alan Oster, chief economist at National Australia Bank.
--By James Glynn, Dow Jones Newswires; 61-2-8272-4685; james.glynn@dowjones.com
