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MELBOURNE, Dec 28 AAP

December 28 2012, 5:28PM

The Australian dollar has closed higher, thanks to a rise in iron prices and gains on the local stock market.

The local unit was trading at 103.74 US cents at 1700 AEDT on Friday, up from Thursday's close of 103.57 US cents.

The Australian dollar rallied during overnight offshore trading to open at 103.77 US cents at the start of the local trading day.

But since 0700 AEDT, the currency stuck to a reasonably tight trading range, moving between a low of 103.62 US cents and a high of 103.89 US cents.

St George chief economist Hans Kunnen said the local dollar's rise was due to firmer commodities prices and positive sentiment from equity markets in the region.

"Iron ore prices are up and equities are up," Mr Kunnen said.

"Part of it is that you watch the equities and you watch the Aussie dollar, on a day-to-day basis they move together, so we've having a firm day in local markets, there could be some offshore buying of Aussie equities.

Iron ore prices climbed about three per cent during the overnight session.

The Australian stock market rose about half a per cent, while bourses in Shanghai and Tokyo were up close to one per cent.

During the day, the Australian dollar peaked at 89.835 yen, the currency's highest level against the Japanese unit since April 2011.

At 1700 AEDT, the Australian dollar was at 89.67 Japanese yen, up one per cent from Thursday's close of 88.82 yen.

The local unit was at 78.35 euro cents, up from 78.30 euro cents previously.

Mr Kunnen said the yen has been losing ground ever since the new Japanese Prime Minister Shinzo Abe came to office and pledged to work with the Bank of Japan to to stimulate the nation's economy.

"It's strengthening against the yen simply on the basis that they're printing money and they've abandoned their low inflation target, so down goes their currency," Mr Kunnen said.

Meanwhile, the Australian bond market closed firmer.

At 1630 AEDT on Friday, the March 10-year bond futures contract was trading at 96.700 (implying a yield of 3.3 per cent), up from Thursday's local close of 96.680 (3.320 per cent).

The March three-year bond futures contract was at 97.290 (2.71 per cent), up from 97.280 (2.720 per cent) previously.

Commonwealth Bank interest rate strategist Phillip Brown said fading hopes of a deal being struck between US President Barack Obama and legislators in Congress over the looming budget deadline prompted a slight rally for bonds.

"The fiscal cliff is getting very close, the fiscal cliff deal is getting no closer at all," Mr Brown said.

The move was most pronounced for the long dated bonds, while three-year yields and futures contract prices were little changed throughout the day in quiet trading conditions.

The fiscal cliff referred to a series of tax hikes and spending cuts in the US due to come into effect in early 2013.

Unless a deal was reached, they were expected to push the US back into recession, possibly trigger a downgrade from the global credit ratings agencies and have a significant knock-on impact on the global economy.