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SYDNEY, Jan 2 AAP

January 02 2013, 5:39PM

The Australian dollar has surged to a two-week high on news the US will avoid a "fiscal cliff" of automatic spending cuts and tax hikes.

At 1700 AEDT on Wednesday, the currency was trading at 104.73 US cents, up 0.9 per cent from 103.83 US cents on New Year's Eve on Monday.

The Australian dollar hit a two-week high against the US dollar of 104.94 US cents on Wednesday afternoon (AEDT), after the US House of Representatives passed legislation that will allow the country to avoid the fiscal cliff measures.

Economists had warned the measures would send the world's largest economy into recession.

Under the legislation passed by Congress, tax cuts that came in during President George Bush's term of office will expire for households earning more than $US450,000 ($A435,097), but lower and middle-income Americans will be spared tax hikes.

Meanwhile, a decision on spending cuts will be delayed by two months, setting the stage for fresh battles between Republicans and Democrats over the coming months.

ANZ foreign exchange strategist Andrew Salter said that, with most markets closed due to New Year's Day holidays, a lack of liquidity had helped fuel the Australian dollar's rally.

"There has been very poor liquidity in foreign exchange markets in the Asian session and the moves we have seen are reflecting that," Mr Salter said.

"Nevertheless, the partial resolution on the cliff is a positive."

Mr Salter said markets would now begin to turn their attention to global growth issues, which was likely to benefit the Australian dollar.

Meanwhile, the Australian dollar also rallied against the Japanese yen, hitting its highest level in more than four years.

It rose as high as 91.52 Japanese yen on Wednesday, its highest level since 01 September 2008, shortly before the collapse of Lehman Brothers.

At 1700 AEDT, the Australian dollar was at 91.31 Japanese yen, up from Monday's close of 89.42 yen.

The local unit was at 78.91 euro cents, up from 78.66 euro cents previously.

Meanwhile, the Australian bond market closed weaker, with futures prices down sharply after in response to the vote in the US House of Representatives.

At 1630 AEDT on Wednesday, the March 10-year bond futures contract was trading at 96.615 (implying a yield of 3.385 per cent), down from 96.745 (3.255 per cent) on Monday.

The March three-year bond futures contract was at 97.200 (2.800 per cent), down from 97.320 (2.680 per cent) previously.

JP Morgan interest rate strategist Sally Auld said bond futures prices opened lower on Wednesday and continued to fall in the lead up to the vote.

"It has been a pretty reasonable sell off, of around 12-13 basis points," Ms Auld said.

"We have pretty much fallen to the bottom of the range we have been in for the past month or so with three-year bonds."

By Evan Schwarten