Dollar dips as rally runs out of steam

The rally that saw the Australian dollar hit a three-month high of US95.35¢ has petered out.

The dollar rose sharply on Thursday after the US Federal Reserve's surprise decision to continue its $US85 billion-a-month economic stimulus program. Late on Friday it had fallen back to US94.50¢.

FXCM analyst David de Ferranti said the weakness in the dollar and the sharemarket indicated a lack of conviction by investors on the sustainability of the post-Fed rally.

"The market is conscious that the Fed is still set to normalise monetary policy and that it is just a question of timing," he said.

The dollar also came under pressure after a report showed that US unemployment claims had a small rise last week.

Mr de Ferranti said that prompted traders to move back to the US dollar.

Meanwhile, bond futures prices were slightly lower, helped by signs that Australian fixed interest rate products are still popular with investors worldwide.

Local bond futures rallied sharply on Thursday after the US Fed's decision to continue its economic stimulus.

Prices started to fall on Friday but then regained some of their losses after a local bond tender.

UBS interest rate strategist Andrew Lilley said the $800 million auction of five-year bonds was highly popular, attracting bids totalling $3.32 billion.

"It is particularly a good sign that there is demand for bonds globally after Australian Commonwealth government bonds were in a soft patch," he said.

"Also last night there was a poor auction of the US inflation-linked bonds - it was the poorest auction in around two years.

"So to see a strong auction for Australian Commonwealth government bonds was a timely indicator there is still a demand for bonds even in this low-yielding environment."

The December 10-year bond futures contract was trading at 95.955 (implying a yield of 4.045 per cent), down from 96.045 (3.955 per cent) on Thursday. The three-year contract was at 97.010 (2.990 per cent), down from 97.050 (2.950 per cent).

AAP