A surprise rise in third-quarter inflation has pushed the dollar to a 4½-month high and all but removed the odds of a near-term interest rate cut.
The dollar jumped by more than half a cent to US97.32¢ after a weaker-than-expected US jobs report suggested a further delay in the US Federal Reserve's stimulus reduction plans.
The dollar received another boost after the September-quarter consumer price index figures exceeded expectations, hitting US97.49¢, its highest since early June.
It then reversed most of its gains in the afternoon session, after reports of Chinese money market rates surging and the yen strengthening on technical spread across regional markets. It was buying US96.45¢ in late trade.
Despite the strong three-quarter CPI figures, economists said underlying inflation remained benign amid continued weakness in domestic demand, an expected rise in unemployment and subdued wages growth.
"The inflation data doesn't prevent another rate cut occurring if push comes to shove, but it makes the hurdle for another rate cut a touch higher," said St George and Bank of Melbourne chief economist Besa Deda.
The headline inflation rate rose 1.2 per cent in the third quarter, higher than economists' expectations of 0.8 per cent. It was boosted by petrol prices, international travel and property and utility rates. The June-quarter headline rate was 0.4 per cent. The headline year-on-year inflation rate fell to 2.2 per cent and remained near the bottom of the Reserve Bank's target band of 2 to 3 per cent.
Underlying inflation, which is more closely watched by the Reserve Bank and is a combination of the mean and weighted median measures, was 0.65 per cent quarter-on-quarter and 2.3 per cent year-on-year.
"We are still in an environment where prices are growing softer. Cost pressures are moderate," NAB's head of Australian economics, Rob Brooker, said, adding that another RBA interest rate cut could be still on the cards.
NAB pushed back its next rate cut forecast from November to February early this month.
Economists and markets have pared back their expectations of further monetary policy easing despite the dollar's recent strength.
The currency has climbed almost 9 per cent against the US dollar since falling below US89¢ in August. But strategists have said the Reserve Bank appeared to be more accepting of the higher exchange rate amid tentative signs of a recovery in the domestic economy, a lift in Asian conditions and improving commodity prices.
The currency could stay higher for months. The Fed's tapering expectations have been pushed out to the first quarter of next year, amid an expected hit on fourth-quarter GDP growth from the US government shutdown, putting downward pressure on the US dollar.
The weaker than expected September US jobs report also increased signs of a delay in stimulus reduction.
Even so, ANZ's head of global markets research, Richard Yetsenga, said he did not expect the Australian dollar's current levels to be sustained as "markets are not going to obsess about the Fed indefinitely".
"You do have tighter policy in China coming through slowly and I expect that to weigh on the currency at some point before the end of the year."