THE Australian dollar fell to a 3½-year low after the central bank indicated the door was open for more interest rate cuts.
The dollar was trading at US102.98¢, down from US103.30¢ on Thursday. During local trade, it dropped as low as US102.56¢, its lowest level since October 24.
In its quarterly statement on monetary policy, the Reserve Bank said the mining investment boom would peak this year and consumer confidence was still relatively weak.
The RBA downgraded its growth forecasts for this year and said inflation was expected to be between 2 per cent and 3 per cent, matching its target range.
"The inflation outlook would afford scope to ease policy further, should that be necessary to support demand," the Reserve Bank said. Forex.com analyst Chris Tedder said retail spending and other non-mining related economic data in Australia had been disappointing.
"The disparity between resource-based industries and the rest of the economy may be causing the [RBA] board some sleepless nights," he said.
Mr Tedder said the RBA's willingness to cut rates, if needed, will continue to weigh on the dollar.
"Evidence of this can be seen in the pair's inability to push back above US103¢ after the impressive Chinese trade data."
On Friday afternoon, official figures showed that China's trade surplus rose 7.7 per cent year-on-year to $US29.2 billion, a sign, Mr Tedder said, that the world's second largest economy was recovering.
Bond futures prices were weaker after the release of Chinese trade data negated an earlier rally.
Late on Friday, the March 10-year bond futures contract was trading at 96.550 (implying a yield of 3.450 per cent), down from 96.555 (3.445 per cent) on Thursday. The three-year contract was at 97.180 (2.820 per cent), down from 97.190 (2.810 per cent).
RBC Capital fixed income and currency strategist Michael Turner said the market rallied slightly on the release of the RBA's statement.
"But we've just drifted off into the afternoon," he said.
"The catalyst was the Chinese trade data, not that there's a particularly strong link given how volatile those data are for January."