The Australian dollar rose to a fresh 17-year high on Thursday after the second straight month of stronger-than-expected domestic jobs data fuelled concerns the central bank might increase interest rates in the near term.
Shortly after the May jobs report was released financial markets priced a 44% probability the Reserve Bank of Australia (RBA) would lift rates to 6.50% next month, Credit Suisse said. That risk was only 24% on Wednesday.
The Australian dollar jumped to $0.8474, its highest level since August 1990 when it touched $0.8475. The Aussie rose to an 18-month high against the euro and a fresh 15-year peak against the Japanese currency .
But financial markets have probably priced in too much risk of a near-term rate increase given the recent tame inflation and wages data, said Deutsche Bank currency strategist John Horner.
"So, we wouldn't be chasing Australian dollar strength here, particularly given equity markets and commodity markets do seem to be under some pressure from the rise in bond yields globally," he said.
In eight sessions it has risen as much as 3.8%.
The Aussie had dipped in offshore trade after Wall Street stocks fell for a second day, prompting investors to trim bets on carry trades, which involve borrowing low-yielding currencies, such as the yen, to invest in high-yielding currencies.
But the Aussie held above the $0.8400 level.
The May jobs report showed the unemployment rate fell to a 33-year low of 4.2% from 4.4% in April, and total employment surged 39,400, far above forecasts of a 10,000 gain.
"It raises the risk of wage pressures rising and interest rates going higher, although we are not forecasting a rate hike until early next year," St George Bank chief economist Steve Ryan said.
The jobs report was just the latest in a string of strong economic data on vehicle sales, housing, consumer confidence, credit growth, construction and business investment.
Still, the RBA held rates at 6.25% for the seventh consecutive month on Wednesday, after it lowered its 2007 inflation forecast last month to the middle of its target band.
Investors now keenly await a speech by RBA Governor Glenn Stevens in Brisbane next Thursday for an update on the central bank's thinking on the economy and the outlook for rates.
"We wouldn't expect too much of a change in tone from the May statement when the RBA did sound quite sanguine about the outlook for inflation and for rates," said Horner from Deutsche Bank.
With monetary policy in the spotlight, New Zealand's central bank unexpectedly raised rates to 8% on Thursday, the highest among industrialized nations, and said it was worried robust consumer demand would further fuel inflation.