Europe's mayhem brings buyers back

The Australian dollar has closed higher, climbing back above US104¢ as the turmoil in Cyprus prompts fresh buying of the local currency.

The Australian dollar has closed higher, climbing back above US104¢ as the turmoil in Cyprus prompts fresh buying of the local currency.

Westpac strategist Robert Rennie said the dollar was a safe haven for investors looking to park money during difficult times in Europe.

Late on Friday the dollar was trading at US104.26¢, up from Thursday's local close of US103.73¢.

The Australian dollar also gained ground against the euro, finishing at €80.90¢, up from €80.13¢.

Mr Rennie said the local dollar became an attractive investment option for market traders during the second half of last year, because of global jitters and the relative strength of the domestic economy.

That sentiment faded at the start of this year, with investors more willing to invest in other markets as things looked to be improving.

But the events in Cyprus, as well as in Italy where politicians were yet to form government and continuing troubles in Greece, had resulted in a return to the safe haven of the Australian dollar.

"Now we are back to really worrying about the outlook for Europe again and that makes the Australian dollar that relative safe haven again that it was in the third quarter of last year," Mr Rennie said.

Some positive Chinese manufacturing data also gave the Australian dollar a boost on Friday.

Meanwhile, bonds have closed firmer, with the market hanging on to gains from overnight trading.

Bonds futures rose in offshore trading following disappointing manufacturing data from Europe and after the European Central Bank set a deadline of Tuesday for Cyprus to agree to a rescue plan.

The June 10-year bond futures contract was at 96.435 (implying a yield of 3.565 per cent), up from Thursday's local close of 96.405 (3.595 per cent). The three-year contract was at 97 (3 per cent), up from 96.96 (3.04 per cent) previously.

Commonwealth Bank interest rate strategist Phillip Brown said market traders were looking ahead to the decision by Cyprus on the European Union's rescue plan.

"Cyprus will the major risk factor early next week," Mr Brown said.