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AAP

2013-01-22

The Australian dollar has rallied against its US counterpart after Japan's central bank announced new measures aimed at lifting the world's third largest nation economy out of a long period of deflation.

At 1700 AEDT on Tuesday, the Australian dollar was at 105.55 US cents, up from Monday's local close of 105.11 US cents.

ForexCT head of research Steven Dooley said the currency climbed about half a US cent after the Bank of Japan announced a higher inflation target of two per cent.

The BoJ said it would conduct "open-ended" asset purchases to help achieve its target, which is aimed at breaking the country out of a long spell of deflation.

But Mr Dooley said the Australian dollar had actually lost ground against the Japanese yen following the announcement, even though the move should have weakened demand for the yen.

"This announcement was widely expected and everyone had bought the US dollar-yen and Aussie-yen ahead of it," he said.

"So when it came there was no one left to buy it and in that situation it (the Aussie dollar) can only go down."

At 1700 AEDT, the Australian dollar was trading at 94.05 Japanese yen, down from 94.13 yen on Monday and at 79.08 euro cents, up from 78.92 euro cents.

Mr Dooley said the market would be closely watching the release of official Australian inflation figures for the December quarter on Monday.

"The RBA has an inflation target of two to three per cent, so that is one of the most important pieces of data when it comes to interest rates."

AAP's survey of 15 economists on Monday revealed a median forecast for 0.5 per cent headline inflation for the quarter, for an annual rate of 2.5 per cent.

Meanwhile, the BoJ announcement had little impact on Australian bond futures.

JP Morgan interest rate strategist Sally Auld said it had been a largely quiet day on the local bond market, due to a lack of liquidity following the Martin Luther King public holiday in the US.

She said futures sold off after the Bank of Japan announced the stimulus measures but prices soon rallied back.

At 1630 AEDT on Tuesday, the March 10-year bond futures contract was trading at 96.665 (implying a yield of 3.335 per cent), unchanged from Monday.

But the March three-year bond futures contract was at 97.230 (implying a yield of 2.770 per cent), down from 97.240 (2.760 per cent).

Evan Schwarten