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MELBOURNE, Dec 31 AAP

December 31 2012, 5:20PM

The Australian dollar has closed marginally higher ahead of the New Year's Day public holiday and amid uncertainty about a successful US budget deal.

At 1700 AEDT on Monday, the local unit was trading at 103.83 US cents, up from Friday's local close of 103.74 US.

The Australian dollar opened the local trading day at 0700 AEDT at 103.66 US cents, having lost ground during weekend offshore trading, but ground up towards 104 US cents during the morning.

The move was not sustained however as the currency gave up some ground in the afternoon, staying within its post-Christmas range between 103.3 US cents and 104 US cents.

Rochford Capital consultant Richard Breen said little could be read into the day's move, given the lack of activity in the market at this time of the year.

Moreover, Mr Breen said those investors working during the festive season were inclined to stay on the sidelines ahead of any news regarding the US fiscal cliff.

"As soon as we hear something from the US, that will really determine near-term direction," Mr Breen said.

"It's a very quiet and illiquid market today."

Negotiations between US President Barack Obama and legislators in the US Congress over the fiscal cliff looked set to go down to the wire.

Talks centred on the best way to avoid a series of tax hikes and spending cuts, which were tipped to push the US economy back into recession and stunt world growth, coming into effect in early 2013.

At 1700 AEDT, the Australian dollar was at 89.42 Japanese yen, down from Friday's close of 89.67 yen.

The local unit was at 78.66 euro cents, up from 78.35 euro cents previously.

Meanwhile, the Australian bond market closed firmer.

The March 10-year bond futures contract finished at 96.745 (implying a yield of 3.255 per cent), up from Friday's close of 96.700 (3.300 per cent).

The March three-year bond futures contract was at 97.320 (2.680 per cent), up from 97.290 (2.710 per cent) previously.

RBC Capital Markets fixed income strategist Michael Turner said negotiations over the fiscal cliff, as well as some volume going through at the back of the yield curve during weekend offshore trading (AEDT), had supported the bond market.

Mr Turner said the volume on 10-year bonds were higher than for the three-years during Friday night's session, which was unusual given trades on the shorter-dated paper usually outnumbered 10-year bonds by about two to one.

"Someone obviously had some flow to clear and they were trying to do it in a pretty thin market so they just couldn't help but move the 10-year futures a fair bit," Mr Turner said.

"We think that was probably behind the move on Friday night, as well as some supportive conditions offshore for bonds."

The Australian bond market was closed for New Year's Day and was due to resume trade on January 2.

By Jordan Chong