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Is the worst over for the Aussie dollar?

Following months of heavy selling, the Australian dollar regained some lost ground after the central bank sounded more hawkish at its first policy meeting of the year, but is the worst truly over for this battered currency?

The Reserve Bank of Australia (RBA) held interest rates steady at 2.5 percent on Tuesday, as expected, but traders focused on the removal of the 'easing bias' from its policy statement, a move which sent the Aussie surging to 1.7 percent against the U.S. dollar to $0.8896.

Kathy Lien, managing director of FX strategy at BK Asset Management, said the bounce could mark the beginning of good times for the battered currency, which was one of the worst performers in the forex league tables last year.

(Read More: Australian dollar has a huge day, thanks to RBA)

"After selling off for the past three months with virtually no relief rallies, we believe that the Australian dollar has officially bottomed," said Lien.

"By dropping their easing bias, the RBA set off a wave of short covering in the Australian dollar last night that we expect to continue in the weeks to come. In fact we are looking for another 4 to 6 percent rally in the currency," she added.

A number of negative headwinds have hurt sentiment for the Australian dollar, which has fallen over 16 percent since hitting a high of $1.0598 last April.

(Read more: Is the euro headed for an Aussie-style crash?)

Fan of one hundred dollar Australian banknotes.
Linda Hides | E+ | Getty Images
Fan of one hundred dollar Australian banknotes.

Worries over the end of the country's mining boom, slowing demand from China - its largest export destination - combined with the onset of a tapering of the Federal Reserve's asset-purchase program have all weighed on the Aussie.

The Reserve Bank of Australia, meanwhile, has effectively talked the currency down, and made it clear late last year that it would rather see the Aussie fall to 85 cents to help stimulate flagging economic growth.

(Read more: Sit up and take notice, Aussie pain is here to stay)

But now that the central bank has confirmed it is comfortable with current levels, the prospect of higher rates is now on the cards. With many analysts forecasting a rate hike this year, some are beginning to wonder whether this marks a turning point for the Aussie.

Emma Lawson, senior currency strategist at National Australia Bank, is not convinced. While she expects the Aussie to stabilize over the next two months, she says it will renew its downtrend over the course of the year and fall back to $0.84 by year-end as Australia's unemployment rate worsens.

The Australian Bureau of Statistics reported in mid-January that the number of people employed decreased by 22,600 in December, well below consensus expectations for a 7,500 increase.

(Read more: Will Australia's jobs shocker put the RBA to work?)

"The adjustment yesterday was overdue, it was more rapid than expected but relatively reasonable," said Lawson.

"But there are lots of risks around, including those from emerging market contagion. The Aussie has a high correlation with emerging markets and general risk sentiment. So if that sell off continues that could hurt the Aussie," she added.

(Read More: Is the emerging market selloff a buying opportunity?)

Fed tapering will also prove to be a headwind for the Australian dollar in 2014, Lawson pointed out, as the greenback strengthens in response.

Andrew Abrahamian, head of FX strategy at Sydney's Compass Global Markets told CNBC he saw the Aussie falling back to 83 cents over the next six to eight months. He also blamed U.S. dollar strength induced by Fed tapering, but noted the RBA was likely to step in again.

"We don't believe the Australian dollar will recover as quickly as the RBA would like and that will keep the RBA pushing the currency lower," he said.

"In the next few months if the economic data continues to be weak, then one more rate cut may be on the cards," he added.

By CNBC's Katie Holliday. Follow her on Twitter @hollidaykatie

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