Dollar hits 25-year high

The Australian dollar closed at a 25-year high today as investors sold the US currency on reduced expectations of that American interest rate would rise.

At 5pm, the dollar was trading at $US0.9643/45, up from Friday's close of $US0.9589/91.

This was the currency's highest close since February 17, 1983, when it was $US0.9653 in the era of the fixed exchange rate.

Westpac currency strategist Jonathan Cavenagh said the Australian dollar benefited from "further US dollar weakness'' as markets lowered expectations for US interest rate hikes this year.

The local currency opened firmer after the US dollar weakened on Friday night following softer personal spending data, which lowered expectations of further American interest rate hikes.

US Department of Labour data on Friday night showed personal consumption expenditure rose by 0.1% in May. This was half the market forecast of a 0.2 per cent increase.

"The Fed outlook, in terms of interest rate expectations, is more uncertain,'' Mr Cavenagh said. "The market has been putting downwards pressure on the US dollar.

"The euro has been a major beneficiary of that and so has the Aussie dollar.''

Data released today domestically showed the effect of higher interest rates across the nation.

A private inflation gauge showed the strongest pace of prices growth in more than five years.

The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.5% in June following a 0.3% rise in May.

In the 12 months to June, the gauge rose by 4.8%.

Home loan approvals posted their slowest yearly growth since the 1991 recession, the RBA said.

Housing credit grew by 10.6% in the year to May, which was the slowest annual pace since August 1991.

Mr Cavenagh said the domestic economy was not performing greatly but was better than other economies.

"It is certainly not in the perilous shape that some of the other economies, particularly the US and the UK, are in at the moment,'' he said. "It is onwards and upwards from here for the Aussie dollar.''

The US currency could be hit tonight if a monthly measure of the business conditions, based surveys of purchasing managers in Illinois, Indiana and Michigan, was softer tonight, Mr Cavenagh said.

The market was forecasting a reading of 48.2 index points for the Chicago Purchasing Managers' Index (PMI) for June, down from 49.1 the previous month.

A reading below 50 indicates a contraction in the sector.

"If there is a slip down in that PMI number, I suspect you could see a fresh round of US dollar selling off on the back of that.''