Australian dollar hits multi-year peaks as bulls bay for rate hikes

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 0.3% at $0.7140 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 113.01 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 $0.5932 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 that 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.

"It is clear from their commentary that senior RBA officials are inclined to view the Iranian conflict as an inflationary shock," said Sally Auld, chief economist at NAB, in a change of view on rates.

"We now expect the RBA to deliver a 25 bp increase to the cash rate at the March meeting, followed by another increase in May," she added. Previously, NAB had looked for just one more hike delivered in May.

Markets had already 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.