THE Aussie dollar closed more than one US cent higher today as financial markets raised the possibility of a rate rise by the central bank next month.
At 5pm (AEST), the Australian dollar was trading at US87.99c, up 1.37 per cent from yesterday's close of US86.79c.
Since 7am, the domestic dollar traded between US86.68c and US88.14c.
RBC Capital Markets senior currency strategist, Sue Trinh said a lift in investor sentiment towards risk had underpinned the Australian dollar.
On the domestic bourse, the benchmark S&P/ASX200 index closed up 1.04 per cent.
"We saw very strong demand from Japanese retail investors out of Tokyo with Japan coming back from their public holiday," Ms Trinh said from Hong Kong.
"That demand showed no signs of abating.
"It then ran into an otherwise balanced RBA minutes, which confirmed they are awaiting the second quarter CPI number next week."
The minutes of the RBA's July 6 board meeting, released today, said that an August rate rise was a possibility if official inflation data was higher than expected.
However, the central bank expects underlying inflation to have fallen, even though the headline rate may be higher.
The consumer price index for the June quarter is due for release on July 28 by the Australian Bureau of Statistics.
The RBA uses monetary policy, or interest rates, to keep inflation within a target band of 2 to 3 per cent over economic cycle.
Ms Trinh said RBC has forecast the central bank to lift the cash rate a quarter of a percentage point to 4.75 per cent on August 3.
Higher interest rates in Australia would support the local currency due its greater yield differential against other nations such as Japan and the US.
Japan's benchmark interest rate is 0.1 per cent while the US Federal Funds rate is in a range of zero to 0.25 per cent.
"A re-rating of interest rate expectations should ultimately support the Aussie (dollar) into the end of the month," she said.
The Australian dollar could move towards US89c by the end of this week following the market's repricing of moves on interest rates by the central bank, Ms Trinh said.
Economic events due during today's offshore session (AEST) include housing starts and building permits in the US, both for June, and an expected rate rise by the central bank of Canada.
Financial markets have forecast the Bank of Canada to lift its key benchmark rate to 0.75 per cent from 0.5 per cent.
Ms Trinh said the market was awaiting the release of the statement accompanying the BoC's decision.
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