THE Australian dollar shot to fresh four-year highs against the yen on Friday as Japan's new government pledged dramatic changes in monetary policy that could finally revive the world's third largest economy.
The dollar hit a fresh four-year peak of ¥94.51, having gained more than ¥2 in two sessions.
The Japanese currency continued to be hit by speculation of more aggressive monetary easing by the Bank of Japan after the approval of a $95 billion stimulus package.
The Australian dollar briefly rose above US106¢ on Friday morning, to touch a four-month high, on US market enthusiasm over better-than-expected trade data from China.
Later in the day the dollar slipped back to US105.71¢.
"Asset markets are taking a very positive view about the global growth," said Derek Mumford of Rochford Capital, a currency risk management firm.
"The market is potentially over-positive and all these risks will come home to roost at some stage in the next couple of months. But at this moment, there is risk appetite and equity markets are buoyant and the Australian dollar is reflecting that."
But while the rising dollar is expected to bring cheer to consumers, its strength has continued to put pressure on industries including tourism and manufacturing.
The dollar later fell against most of its 16 major counterparts after data released on Friday showed inflation in China - Australia's biggest trading partner - quickened more than expected and spurred concern policy makers will struggle to balance price gains and growth.
"The fact that the [Australian dollar] struggled so hard to break through the US106¢ level and didn't quite make it made people wonder whether it's due for a little bit of a pullback," said Sean Callow, a senior currency strategist at Westpac.
The rise of the dollar came as National Australia Bank announced that it was lowering its official cash rate forecast for this year to 2.25 per cent, "with the economy continuing to weaken and unemployment set to rise noticeably through 2013".
The forecast goes against market expectations of a 30 per cent chance the Reserve Bank would cut rates next month, Credit Suisse data showed.