Australian dollar heads for hefty weekly gains

The Australian dollar held near recent highs on Friday after the central bank raised its forecasts for economic growth and inflation, putting the currency on track for the largest weekly gain since September.

The Aussie cooled off slightly to $0.8938 after trading at $0.8964 in early deals, but was not far off a four-week peak of $0.8981 touched Thursday.

(Read more: Australia stocks no longerexpensive: Goldman)

It has gained around 2.1 percent so far this week after the Reserve Bank of Australia (RBA) dropped its easing bias and scaled back its verbal rhetoric for a lower currency.

Earlier in the session, the Aussie briefly edged higher after the release of the RBA's quarterly monetary policy report. The central bank again reiterated that rates were likely to remain steady for a while as stimulatory policy and a weaker local dollar were working to support the economy.

Bloomberg | Bloomberg | Getty Images

"Initially, the Aussie rose in a logical reaction," said Sean Callow, a senior rate strategist at Westpac.

"But since then there has been a pull back that gives the impression that there is a lot of short-term money flushing around at the moment and perhaps closing out on Aussie long positions ahead of U.S. payrolls," he added.

(Read more: Is the worst over forthe Aussie dollar?)

Non-farm payrolls data is due later on Friday and there is much uncertainty about what it will show given weakness in December, bad weather and an end to long-term jobless benefits.

Callow said a strong number could knock back the Aussie to the high 88 cents area, while a very weak figure could send it past 90 cents.

So far, the Aussie has been unable to sustain above a key chart barrier of $0.8988. Next resistance would target $0.9087, the January peak, while immediate support was seen at $0.8940.

RBA concerning Aussie investors: Pro

The Aussie was also holding hefty gains against the yen, euro and pound. It was trading at 91.38 yen, having gained two full yen so far this week.

Likewise, the euro dropped to a three-month low of A$1.5016 overnight before bouncing to A$1.5165. The , opting to wait for more data before taking action.

The Aussie was a clear standout against the pound which had its largest weekly slide in two years. It fell 2.7 percent to a low of A$1.8120 largely on profit taking.

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

Against its New Zealand peer, the Aussie steadied at NZ$1.0864, from a peak of NZ$1.0948 touched Tuesday.

The consolidated its recent gains sitting around the 50 day-moving-average of $0.8240, a touch below the local open, but well up on the five-month low of $0.8052 hit on Monday.

A combination of solid data at home and in Australia and more stable sentiment about emerging markets have helped to underpin the kiwi.

The next test is the U.S. non-farm payrolls data.

(Read more: Dollar drifts lowerwith focus turning to US jobs report)

"A strong non-farm payrolls number, following last month's weather-affected drop, should see the U.S. dollar bought across the board," said ASB Bank economist Daniel Smith.

Near term support for the kiwi is seen at $0.8220 and below that $0.8190, with the topside guarded at $0.8280 and just above $0.8300.

The local data calendar is all but bare next week leaving the kiwi to be driven by external influences.

New Zealand government bonds had an offered tone, with yields 3 basis points higher along the curve.

Australian government bond futures fell with the three-year bond contract down 6 ticks at 96.960. The 10-year contract lost 5.5 ticks to 95.915, well off the week's peak at 96.135.