/www.fxserver.com/ THE Australian dollar has slipped slightly in morning trade but remains higher compared to yesterday's close after surging through $US0.6200 overnight.
Australia's bond market sold off rapidly after domestic inflation data erased market expectations for future interest rate cuts.
At 1200 AEST the Australian dollar was at $US0.6194/99 from 0.6170/75 at yesterday's close.
The Australian dollar soared to fresh three year highs at $US0.6230 in New York trade as the US dollar was slammed lower across the board.
Through the morning session, the local currency has traded down to a low around $US0.6195 after an early high of 0.6216.
Strategists noted with the shortened week, the domestic currency was unlikely to find any momentum during the local session.
Commonwealth Bank currency strategist Alex Schuman said Asian investors had been cautious to the overnight rally and so the local currency had softened slightly.
Mr Schuman also said while the market had yet to react to local inflation data released by the Australian Bureau of Statistics today, the Australian dollar was likely to drift a little lower.
Australia's consumer price index rose 1.3 per cent in the March quarter taking the annual inflation rate to 3.4 per cent.
This annual rate comes in above market expectations of 3.2 per cent and well above the Reserve Bank of Australia's (RBA) target 2-3 per cent target band.
Mr Schuman said it was expected that the Australian dollar would trade higher on the back of these figures based on the view that with inflation at such high levels it would be harder for the RBA to ease interest rates.
But given traders had been taking long positions leading up to the 1130 (AEST) release, the local currency had not yet reacted to the CPI figures.
"People had been long the Australian dollar going into the figure so there might be a little bit of squaring up in the aftermath of the numbers," Mr Schuman said.
"It might just drift a little lower in the afternoon ... but it would remain well bid particular in the European cycle."
The longer term situation was that the US dollar has been weakening across the board and this was likely to see continued strength for the Australian dollar, Mr Schuman said.
At 1200 AEST the yield on the Commonwealth Government June 2011 bond was at 5.365 per cent from 5.315 at yesterday's close. The yield on the November 2006 bond was at 4.865 per cent from 4.815.
On the Sydney Futures Exchange the June 2003 10-year bond futures contract was 94.62 from 94.67 at yesterday's close and the three-year contract was at 95.11 from 95.17.
MMS International strategist Glen Bull said bonds had sold off strongly following the CPI data release.
"You just get the feeling now that the markets have started to think things aren't lining up for a rate easing now," he said.
Mr Bull said it looked like the market could break down, especially in the short end, where the bank bill futures contracts had broken through support.
He said inflation expectations were likely to increase from here and bond futures prices were likely to start to reflect a movement back to a more neutral bias for interest rates.