The Australian dollar edged below six-week highs against a broadly stronger US dollar on Tuesday, ahead of inflation data on Wednesday that might prompt Australia's central bank to raise interest rates by year-end.
But the Aussie held firmly above $0.7560 heading into the pivotal consumer price index (CPI) report and the release of the Reserve Bank of Australia's measure of underlying consumer price inflation.
Analysts said the local currency had traded in a narrow range - $0.7566 to $0.7579 - as investors squared positions before CPI data in both Australia and New Zealand on Wednesday and the Federal Reserve's decision on interest rates later that day.
"I see us very much in the twilight zone, moving backward and forwards between focusing on the risks in our centres - Aussie and kiwi - and, obviously, the Fed as well," said Robert Rennie, chief currency strategist at Westpac Banking Corp.
At 4 pm (0600 GMT) the Aussie dollar was quoted at $0.7571/76 compared with $0.7600/03 here late on Monday, according to Reuters data. The local currency touched a fresh six-week high of $0.7615 early in offshore trade on Monday.
Analysts forecast underlying inflation to have risen 0.8 percent in the third quarter, the median of a Reuters poll of 20 analysts showed. Some analysts predict a rise of 0.7 percent or more could be enough for rates to rise a soon as next month.
John Kyriakopoulos, a currency strategist at nabCapital, a division of National Australia Bank, said if Australia's underlying inflation for the quarter was benign, then the Aussie could fall below $0.7500, with a key support level of $0.7480.
Still, markets flirted with the risk that a 25 basis points rise to 6.25 percent might not be enough to satisfy a Reserve Bank of Australia (RBA) that wants to restrain inflation.
"Our economists continue to highlight the risk that we need to think about a follow up move from the RBA," Rennie said.
The Aussie has been underpinned for the past two weeks after hawkish comments by new Reserve Bank of Australia Governor Glenn Stevens and data showing better-than-expected local jobs growth.
Stevens told business economists conference this month that his main job in the near term was to restrain inflation, adding that expectations of future inflation must remain well anchored.
The US dollar steadied against the yen on Tuesday after getting a lift the previous session as traders braced for the Fed to reiterate concerns about inflationary pressures.
The Aussie was hovering near a fresh 10-month high of 90.47 yen, touched offshore, while the Aussie/euro cross was near seven-month highs.
"In an environment where we have historical low levels of equity, debt and forex volatility, that's an environment that is good for traditional carry trades," Westpac's Rennie said.
Carry trades involve investors borrowing in a low-yield currency like the yen to invest in a high yielding currency. The Aussie also edged up against the New Zealand dollar as financial markets scaled back the risk of New Zealand's central bank raising interest rates on Thursday.
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