THE dollar opened stronger today, having earlier reached a two year high, after dovish comments from the US Federal Reserve weakened the US dollar.
At 7am (AEST), the dollar was trading at 97.40 US cents, up from Friday's close of 96.73 cents.
Since 5pm (AEST) on Friday, the "Aussie" traded in a tight range between 96.53 US cents and 97.51 cents.
The latter was the currency's highest since it touched 97.92 US cents on July 25, 2008.
Bank of New Zealand currency strategist Mike Jones said the Aussie rose after an influential US federal Reserve policy maker, William Dudley, said the central bank is likely to take additional action to rejuvenate the US economy and lower unemployment.
"That triggered some selling of the US dollar and provided some lift to currencies," he said.
"The Aussie managed to squeak out a fresh 26 month high. Really it hitched a ride off the weak US dollar."
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Mr Dudley, president of the Federal Reserve Bank of New York, said on Friday the pace of US economic growth had been disappointing said if the economy doesn't strengthen, the risk of an outbreak of deflation would rise.
Deflation is when goods and services prices, wages and the values of homes and stocks all decline.
"We have tools that can provide additional stimulus at costs that do not appear to be prohibitive," Dudley said in a speech in New York.
"Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long." Mr Jones said he expected the Aussie's upward bias to remain ahead of tomorrow's interest rate decision by the Reserve Bank of Australia (RBA).
The futures market is pricing in about a 60 per cent chance that the RBA will take the cash rate from 4.5 per cent to 4.75 per cent following its regular monthly board meeting.
But even if the central bank opts to leave the cash rate on hold, Mr Jones said he expected the unit to trend higher if the RBA hints at a later rate rise.
"The statement accompanying the decision will be more important than the decision itself," he said.
"The Aussie will still have an upward bias."
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