The Australian dollar gained more than one US cent to reach a 25-month high on Wednesday.
The rise came on prospects that interest rates in Australia will rise soon while those in the United States are expected to stay at near record lows.
The interest rates differential between the two countries has widened and enticed a flow of money into the local unit.
At 1700 AEST, the local unit was trading at 95.64 US cents, up from Tuesday's close of 94.54 cents.
Since 0700 AEST on Wednesday, the local currency traded between 95.34 cents and 95.83 cents.
The rise follows the US Federal Reserve deciding to engage in another round of quantitative easing to help prime the US economy which already has ultra low official interest rates around 0.25 per cent.
In a statement on Tuesday night (AEST) the US Federal Reserve used the same language it did in August to sketch a downbeat view of the US economy and concluded that American economic activity had slowed in recent months.
It stands in direct contrast to the Reserve Bank of Australia's (RBA) recent comments about the health of the domestic economy and prospects for an interest rate rise soon.
Nomura Australia chief economist Stephen Roberts said the local unit reached a peak of 95.83 US cents in late morning trade.
'You've got the exact polar opposite of what the central bank is planning to do here compared with what the Fed is probably preparing the market for in the United States,' Mr Roberts said.
He said the US dollar had potentially reached a soft spot against most currencies.
At 1700 AEST, the Australian dollar was at 81.13 Japanese yen, up from Tuesday's close of 80.68 yen, and at 71.80 euro cents, down from its previous close of 72.30.
The euro finished at 1.3322 US dollars, up from 1.3074 US dollars, and at 113.04 yen, up from 111.58.
The US dollar was at 84.86 Japanese yen, down from 85.35 previously.
Longer-dated Australian government bonds gained ground on Wednesday, led by rallying US Treasuries overnight but short-dated bonds were hampered by expectations of tighter monetary policy in Australia.
At 1630 AEST on the Sydney Futures Exchange, the December 10-year bond futures contract was at 94.870 (implying a yield of 5.130 per cent) up from Tuesday's close of 94.820 (5.180 per cent).
The December three-year bond futures contract was at 95.070, (4.930 per cent), in line with its previous close.
The local debt market had been generally weaker overnight, in the wake of a speech on Monday by Reserve Bank of Australia (RBA) governor Glenn Stevens and the release on Tuesday of the minutes of the RBA's September 7 policy meeting.
The Australian market's rally in response to the consequent gains in the US Treasury market were not surprising, said Matthew Johnson, an interest rate strategist at UBS.
The Australian Office of Financial Management (AOFM) sold $500 million in Treasury bonds maturing on July 15, 2022 at a weighted average issue yield of 5.180 per cent.
'There was incredibly good demand for the bond,' Mr Johnson said.
'We saw a push up in 10-year futures immediately after that auction and that caused the curve to flatten a bit more.'
The RBA's Australian dollar trade weighted index (TWI) was 72.7, up from Tuesday's close of 72.3.
