Australian dollar hits multi-year highs as bulls scent rate rise

By Wayne Cole

SYDNEY, March 11 (Reuters) - The Australian dollar paused near multi-year peaks against a range of peers on Wednesday as markets sharply narrowed the odds on an imminent interest rate hike in one of very few developed nations to be tightening policy.

The Aussie was up at $0.7127 AUD=D3, having hit a 45-month top of $0.7168 overnight to briefly clear a high from 2023 at $0.7158. The next major bull target is around $0.7270.

It struck a 35-year peak on the yen at 112.87 AUDJPY=R, along with a near 13-year high on the New Zealand dollar AUDNZD=R and a 15-month top on the euro AUDEUR=R.

The kiwi dollar lagged at $0.5927 NZD=D3, with a rate rise in New Zealand not seen likely until September.

Much of the Aussie's gains came after Reserve Bank of Australia Deputy Governor Andrew Hauser on Tuesday warned that the spike in oil prices would push inflation higher and add to pressure for a rate rise at its policy meeting next week.

RBA Governor Michele Bullock had already cautioned markets the March 17 meeting would be "live" on rates. Hauser underlined there would be a "genuine debate" about hiking, while noting much uncertainty about events in the Middle East.

"We take Hauser's comments as putting the market on notice that it should not be surprised if the RBA decides to raise rates next week," said Sally Auld, chief economist at NAB.

"NAB's view remains for a rate hike in May. Ultimately, the direction of travel is clear, but the timing is up for debate."

Markets took the Hauser hint and doubled the probability of a March hike to around 65%, with a quarter-point rise to 4.10% more than fully priced for May. 0#AUDIRPR

There are now 58 basis points of tightening implied for this year, which would take rates back to the post-pandemic peak of 4.35% hit when consumer price inflation was running above 7%.

Headline inflation is currently at 3.8% and is set to top 4.0% given the ongoing rise in petrol prices. Core inflation is a bit more moderate at 3.4% but remains well above the RBA's target band of 2% to 3%.

The hawkish outlook for domestic policy has combined with the inflation risk from oil to lift Australian three-year bond yields AU3YT=RR to levels not seen since mid-2001.

The current yield of 4.488% is 88 basis points above Treasuries, near the widest since 2016.