Dollar rallies ahead of FOMC decision

THE Australian dollar has soared to its highest level in three weeks amid optimism the US Federal Reserve will introduce a fresh round of economic stimulus.

THE Australian dollar has soared to its highest level in three weeks amid optimism the US Federal Reserve will introduce a fresh round of economic stimulus.

At 17.00 AEST on Wednesday, the currency was trading at 104.72 USA cents, up from 103.50 US cents on Tuesday.

During intraday trade it rose as high as 104.91 US cents, its highest level since August 23.

ANZ foreign exchange strategist Andrew Salter said the Australian dollar's performance showed traders were optimistic ahead of the meeting of the US Federal Open Market Committee (FOMC), which will finish early on Friday morning, Australian time).

Mr Salter said Fed Chairman Ben Bernanke's recent speech to central bankers at Jackson Hole, Wyoming suggested the FOMC was about to introduce a third round of quantitative easing (QE3) to support the US economy.

"Bernanke made a very strong case for QE3 at Jackson Hole and our expectation is that will be delivered when the meeting concludes on Thursday night," he said.

He said the currency's rally also suggested markets were confident Germany's Constitutional Court would reject a high profile challenge to the euro zone's European Stability Mechanism (ESM).

The court will announce on Wednesday night whether or not it will uphold the challenge to the measure, which is considered a key tool in efforts to alleviate Europe's sovereign debt crisis.