The Australian dollar seesawed in a firm but narrow range on Monday as investors booked profits after gains of nearly 4 percent in the past two weeks and awaited a statement from a Federal Reserve policy meeting later this week.
The currency peaked at $0.7963, just 13 pips short of a 10-week high of $0.7976 reached in offshore trade on Friday following hawkish comments by a top Australian central banker, who warned the outlook for domestic inflation was higher than ideal.
Financial markets expect the US central bank to keep interest rates at 5.25 percent after a two-day meeting that ends on Wednesday, leaving investors to focus on the Fed statement for clues on the rate outlook and any comments on the housing market.
"In the previous statement on January 31, they still judged that some inflation risks remained and they suggested there were some tentative signs of stabilisation in the housing market," said Besa Deda, currency strategist at Commonwealth Bank of Australia.
"It will be really those two sentences that will be closely watched, particularly any remarks on the housing market."
The US dollar had been under pressure against major currencies on Friday over concerns that the growing crisis in the US subprime mortgage market could spread and curb economic growth.
The Aussie dollar was quoted at $0.7954/58 compared with $0.7919/24 here late on Friday, according to Reuters data. Its session low was $0.7932. The 30-day interbank futures market priced about a 26 percent chance Australia's central bank would lift rates by 25 basis points to a 10-year high of 6.50 percent in April.
But Macquarie Bank interest rate strategist Rory Robertson said a quarter of a percentage point rise by the Reserve Bank at its April policy meeting seems close to an even-money bet.
Analysts said there was little reaction by the Aussie to China's decision at the weekend to raise rates for the third time in less than a year, although it might temper base metal prices.
"To be honest, I don't think the Aussie has reacted much to that Bank of China decision," Deda said. "If you look at the Aussie, it's pretty much been fluctuating in a very narrow band."