Speculation of the chance of an interest rate rise as early as next month has now strengthened to at least 40 per cent, as futures market momentum propels the dollar.
The dollar is expected to trade above the US80c barrier for at least a week, driven by aggressive new short positions, but a fresh bout of "risk aversion" has now emerged in some forecasts.
And the greenback was markedly weaker in most of the big swaps yesterday, as fears grew over the future of the world's largest economy.
Economists are now speculating that the Reserve Bank of Australia will raise rates to 25 basis points to 6.5 per cent when it meets in April.
Financial markets were taken aback last week by the RBA's surprise move to effectively warn that interest rate pricing was too low.
The 40 per cent likelihood is a substantial increase on last week's pricing, which had it set at less than 3 per cent.
Investment bank JP Morgan has put it at almost 50 per cent that the cash rate will be shifted to 6.5 per cent in April.
"The most likely triggers are the May budget, which almost certainly will include sweeteners, given that the Government trails the Opposition in opinion polls and is desperate to catch up, another rise in credit growth, and more evidence that wage pressure is building," chief economist Stephen Walters said.
The dollar shot as high as US80.33c in international trade yesterday morning, before the start of local equities trading.
The domestic currency then retreated, but the marginal softening allowed active traders to take on new positions.
Last night the dollar was hovering at US79.96c as most analysts predicted the currency would push back through the next benchmark.
It has touched US80c twice in the past 18 months, but its peak yesterday was the highest in more than 10 years.
The currency, according to the Reserve Bank, has spent just 5 per cent of its trading time above US80c in the past 22 years.
The number of long-term contracts being taken out on the dollar is starting to be rebuilt after a marked reduction as a result of the stock market jitters.
Westpac currency strategist Jonathan Cavenagh said the dollar momentum was being provided by short traders chasing the yields.
Hedge funds are understood to have been active buyers yesterday on the interest rate speculation while the carry trading has been reset.
The dollar, along with the New Zealand dollar, has been the target of active buying as investors borrow in the low-rate Japanese yen and buy into the high-yield currencies.
"The people who are in the short-term plays are potentially speculating that the RBA may hike rates," Mr Cavenagh said.
"There's still upside risk in the dollar from here.
The effect of the dollar movement was seen in the market yesterday, especially as building company stocks were punished.
Economists said retailers stood to benefit from the currency, as imports were made cheaper and profit margins could be inflated.
The US Federal Reserve is expected to announce that it will leave rates on hold at 5.25 per cent following its meeting overnight.
Source: The Australian
