The Australian dollar rose 0.5 percent to a one-week high against the US currency on Tuesday after domestic growth data beat expectations, reviving speculation interest rates may need to rise further. Australia's second-quarter gross domestic product rose 0.9 percent on the previous quarter, for an annual rise of 4.3 percent, exceeding forecasts for 0.6 percent and 3.8 percent growth respectively.
The local currency was also supported by a rise in most regional stock markets, which pointed to a tentative return of risk appetite after the credit market turmoil of the past month.
"Focus could return to data releases this week as long as stock markets can hang onto recent gains," said Tony Morriss, senior currency strategist at ANZ. "That should be a positive factor for the Australian dollar in light of recent releases and today's GDP data that has highlighted considerable economic momentum and rising inflation pressures."
The Aussie was quoted at $0.8267/69, up from $0.8222/25 here late on Monday, Reuters data showed, and off a low of $0.8155 struck in quiet offshore trade. US markets were closed on Monday for the Labour Day holiday. Against the Japanese yen, the Aussie was quoted at 95.75/85 yen, nudging up from 95.48/58 yen on Monday.
Investors remain cautious about piling back into risky carry trades, wary that a fresh round of headlines on losses by financial institutions could lead to a further squeeze in credit conditions.
Carry trades, which involve borrowing in a low-yield currency like the yen to buy a high-yielder like the Aussie, were the foundation of the Aussie's rally to the multi-year highs hit back in July.
The recent turmoil in global markets is expected to see the Reserve Bank of Australia's (RBA) board keep interest rates steady at a decade high of 6.50 percent when it announces its decision on Wednesday.
"The RBA's tightening bias remains and is supported by today's data but we suspect that they will remain sidelined in the coming months to assess the global fall out," said Su-Lin Ong, senior economist at RBC Capital Markets.
After the central bank's rate decision on Wednesday, focus will be on the August jobs report. The median forecast is for another solid rise of 18,750 in net new jobs and the unemployment rate to hold at a 33-year low of 4.3 percent.
Australian bond futures were sold off after the strong data underlined the strong demand in the economy, raising the risk that the central bank tightens policy to curb inflation pressures. Three-year Australian bond futures were down 0.06 points at 93.72 while the 10-year contract lost 0.025 points lower at 94.025.