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Australian dollar set to seal best year since 2010, NZ$ lags

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The Australian dollar was on track for a third straight week of gains on Friday, and its best annual performance in seven years, as optimism for global growth and strong commodity prices helped offset its shrinking yield advantage.

[SYDNEY] The Australian dollar was on track for a third straight week of gains on Friday, and its best annual performance in seven years, as optimism for global growth and strong commodity prices helped offset its shrinking yield advantage.

The Australian dollar was taking in the view at US$0.7802, having touched a 10-week top of US$0.7810 overnight. That left the commodity currency with gains of more than 8 per cent for the year, its best showing since 2010.

That performance would be a surprise to many given that a global Reuters poll of analysts at the start of the year found the Aussie would 2017 at 72 US cents.

Surprising resilience in Chinese demand for commodities, including iron ore - Australia's biggest export earner - has certainly helped. The mineral currently fetches more than US$70 a tonne after having been down around US$50 a few months ago.

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Industrial bellwether copper was also on a tear, hitting a four-year peak to be up 30 per cent for 2017.

Yet some wonder how long the Aussie could defy gravity given official US interest rates were almost certain to move above Australia's next year.

The premium offered by Australian two-year bonds over their US counterpart is already down to almost nothing and set to turn negative for the first time since 2000.

"Risk is rates differentials will move further against the AUD at the front end of the curve at least," said Ray Attrill, NAB's head of forex strategy.

NAB expects official US rates to reach 2 per cent by mid-2018, fully 50 basis points above the Reserve Bank of Australia's cash rate.

"Even on current differentials AUD is seen moving into a lower US$0.70-US$0.75 trading band in the first half, with downside risks depending on broader US dollar performance, risk sentiment and commodity prices," added Mr Attrill.

Across the Tasman Sea the New Zealand dollar edged up to US$0.7098 having also reached a 10-week peak overnight.

The kiwi was 2.3 per cent firmer for the year, a relatively solid performance given it had to weather a bout of political uncertainty when the country's long-serving conservative government lost power.

Australian government bond futures inched ahead for a third session. The three-year bond contract added three ticks to 97.835, while the 10-year contract rose one tick to 97.3150.

REUTERS