THE dollar rose back towards a two year high after strong manufacturing data out of China suggested the strong demand for the country's commodities will continue.
At noon (AEST), the local unit was at 96.95 US cents, up from yesterday's local close of 96.82 cents.
It reached 97.32 cents overnight, the highest since July 2008, before declining to as low as 96.27 before the local session's recovery.The local unit was well supported by better than expected data out of China, showing a rise in the official purchasing managers' index (PMI) to 53.8 in September from 51.7 in August.
This made August the 19th straight month that the official PMI has stood above the threshold of 50 that demarcates expansion from contraction.
This suggests that China will need to keep importing Australia's resource products to support manufacturing.
"This was a significant upside surprise relative to consensus expectations which were for an increase anyway," 4Cast head of research Ray Attrill said.
Mr Attrill said the data would add to expectations that the RBA will increase the cash rate when it meets on Tuesday.
"If there's a single piece of news that impacts on the RBA's thinking of the external environment and how that impacts on Australia, it's this," he said.
"And in a way, the Aussie is reacting to the increased likelihood of the RBA pulling the trigger next week."
The good data from China came shortly after an Australian survey found activity in the manufacturing sector had contracted in September.
According to Mr Attrill, the RBA will be putting more weight on the Chinese figures as they prepare for their meeting next week.
"Those data (Australian PMI) are relatively minor in the scheme of things when the RBA is taking a very much forward looking view of how much confidence it has in its 2011 growth outlook."
He said the currency was likely to reach its overnight high of 97.32 during Friday's local session.
