Dollar lower ahead of Spanish bond auction

THE Australian dollar is slightly lower in quiet trade as investors sit on the sidelines awaiting the outcome of a Spanish government bond auction.

THE Australian dollar is slightly lower in quiet trade as investors sit on the sidelines awaiting the outcome of a Spanish government bond auction.

At 5pm AEST, the local unit was trading at 103.63 US cents, down from 103.85 cents yesterday.

Since 7am AEST, the Australian dollar traded between 103.48 US cents and 103.58 cents.

The Spanish government will auction up to 2.5 billion ($A3.17 billion) in two- and 10-year bonds on Thursday night (Australian time).

The Spanish government raised more than 3.18 billion euros ($A4.05 billion) in an auction of short-term government notes and bills earlier in the week.

The successful bond auction was seen as a significant test of market confidence in Spain, after the costs of government debt via bond yields, rose sharply in recent months, raising fears of the country's ability to meet its debt commitments.

Easy Forex senior dealer Francisco Solar said the Australian dollar and the euro had been trading in tight ranges of less than half a US cent.

"It's been very very quiet," he said.

"There seems to be a bit of focus on today's bond auction.

"Yesterday's bill auction, was actually a bit of a boost.

"Markets are really waiting for the two-year and 10-year paper today, which is why the Aussie hasn't moved that much."

Mr Solar said one factor stopping the Australian dollar falling too far on Thursday was a news report that Chinese central bank was considering cutting its reserve ratio requirement, the amount of money commercial banks have to keep on hold.

The move would free up more funds for banks to lend in an attempt to stimulate the economy.

"The Aussie has found a little bit of support on the back of that," Mr Solar said.

At 5pm AEST, the Australian dollar was at 84.41 Japanese yen, level with Wednesday's close, and at 79.03 euro cents, down from 79.19 euro cents.

Meanwhile, Australian bond futures prices rose.

At 4.30pm AEST on Thursday, the June 10-year bond futures contract was trading at 96.230 (implying a yield of 3.770 per cent) up from 96.190 (3.810 per cent) at Wednesday's close.

The June three-year bond futures contract was at 96.780 (3.220 per cent), up from 96.760 (3.240 per cent).

ANZ senior economist Shane Lee said global developments had been the main driver for bonds on Thursday.

"The data overnight was a bit mixed, so there's no strong lead," he said.

"Equities are a bit weaker in Europe and the US market is down as well.

"US Treasuries rallied a touch overnight and that's flowed through to our market."

Mr Lee said Europe would be the focus overnight as France and Spain seek a positive investor response to auctions for short- and long-term bonds.

"The auction in Spain tonight will be well watched by the market," he said.

"Until next week, domestic data flow won't drive our bond prices too much."

The Reserve Bank of Australia's trade weighted index fell to 76.7 on Thursday, from 77.0 on Wednesday.