A sharp rise in consumer confidence in February fuelled a strong bounce by the dollar yesterday.
At 5pm AEDT, the currency was trading at $1.0339, up US0.84c, after touching an intraday high of $US1.0361.
A survey published by Westpac and the Melbourne Institute showed consumer sentiment rose by 7.7 per cent from January to an index level of 108.3 points, the highest reading since December 2010. In annual terms, the consumer sentiment index rose 7.2 per cent.
Economists said the combination of falling interest rates, a 7.6 per cent rise in share prices since January 1, and tentative signs of a recovery in house prices had lifted confidence.
"The more positive February reading suggests lower interest rates may finally be starting to gain more traction with the consumer," Westpac chief economist Bill Evans said in a statement.
The hurdle for a further cut in interest rates at the Reserve Bank has also risen as a result.
Financial markets yesterday priced in a possible further cut in interest rates in May, well out from next month, which had been a popular forecast among economists in recent weeks.
"The latest upbeat data suggests that the Reserve Bank will stay on the interest rate sidelines for longer, preferring to see how the economy responds to prior rate cuts," said Craig James, chief economist at brokerage house CommSec.
The RBA left its benchmark cash rate unchanged at 3 per cent last week, citing fewer global threats and signs the domestic economy was warming to a recent string of interest rate cuts.
The central bank has slashed interest rates by 1.75 percentage points since November 2011 as it strives to spur non-mining parts of the economy hardest hit by a cooling resources boom that has powered Australian growth for at least a decade.
Still, the dollar remains at risk of renewed weakness as Japanese and speculative investors continue to lighten their exposure to the currency, said Sean Callow, a currency strategist at Westpac.
