SYDNEY (Dow Jones)--The Australian dollar was weaker in Asian trade late Tuesday as the U.S. currency selloff of the past week eased to a halt amid thin volumes in foreign exchange markets. The domestic unit is expected to consolidate around current levels in the near term and remains close to very important technical levels, which will provide some significant resistance for the currency. Global liquidity has been restrained in recent trading sessions with the U.S. and U.K. markets closed for public holidays. At 0620 GMT, the Australian dollar was quoted at US$0.7786 from US$0.7812 late Monday. It fell to an intraday low of US$0.7747 on the back of comments from the South Australia state Treasurer Kevin Foley that he expects his government will lose its AAA credit rating as the state's fiscal position deteriorates. Against the Japanese yen, it was Y73.76 from Y74.28. Commonwealth Bank of Australia Chief Currency Strategist Richard Grace said the Australian dollar may have run a little bit ahead of itself in its most recent leg up in the past week. "I think we may see the U.S. dollar recover after seeing it heavily sold last week," Grace said. "That means Aussie may dip down a little bit to sub-US$0.7700 and go through a period of consolidation." Grace expects a consolidation period to last a few weeks before a more concerted push toward the US$0.80 mark. However, Westpac currency strategist Jonathan Cavenagh said weekly fair value estimates for the currency are now below the spot price for the first time since February when it was trading in the low US$0.6000 area. He now sees a fair value around US$0.7650 to reflect some leveling off in model inputs, which include yield spreads, commodity prices and risk appetite. With the Australian dollar now close to the important US$0.7930 50% retracement levels of its cyclical peak to trough decline, the currency is at a critical juncture. "To be confident of calling a move through this level our model suggests we need to see further improvement in the fundamentals," Cavenagh said. He said further strength in fair value estimates remains unlikely in the near term, which would suggest fading Australian dollar strength as a good trading strategy. Australian bond futures were firmer in the Asian session as safehaven flows picked up on the back of geopolitical concerns after reports that North Korea is preparing short-range missile tests. This follows reports of the nation's testing of a nuclear device Monday. Australian June three-year bond futures were six ticks higher at 96.01. The 10-year bond futures were five ticks higher at 94.795. Westpac Chief Interest Rates Strategist Damien McColough said despite recent concerns about AAA credit ratings in the U.S. and U.K. and also oversupply in those nation's bond markets, Australian bonds have remained relatively well-bid. "We are not yet at the stage where offshore investors have said "you're going to have to give me a lot more yield to entice me into the market'," McColough said. However, even with continued support, he still expects the spread between the three- and 10-year bond yields to widen in line with broader global trends. "We can probably see steeper curves than any of us have imagined - in the short term that's going to be limited in Australia but broadly speaking...curve steepening themes are going to be the same globally," he said. This could mean a three-to-10-year yield spread of 150 basis points, a level not seen since 1992, from a current level of 121 basis points.

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