The Australian dollar rose 2 per cent on Thursday. National Australia Bank chief economist Alan Oster said the RBA may resort to talking the dollar down if it crept towards the US73¢ or US74¢ mark. But signs that the recent market "kerfuffles" had adversely affected the non-mining economy would be needed for them to consider a cut, he said. "To the extent that the Australian dollar goes higher, that's a negative to the non-mining economy, but it is still helpful having a currency at US71.70¢," he said. On Thursday afternoon the dollar was buying US71.82¢. The currency surged more than 2 per cent on Thursday to US71.88¢, its highest point in a month after the US dollar posted its worst day in seven years on weak services sector data and a speech by US Federal Reserve president William Dudley in which he said the Fed outlook could change on tightening market conditions. The latest hit to the US economic recovery was the Institute for Supply Management's non-manufacturing index registering at 53.5, its lowest reading since February 2014.

"The volatility in the financial markets, decline in commodity prices and weakness in parts of the US economy is beginning to shake the Fed's confidence," BK Asset Management managing director of FX Kathy Lien said. The New Zealand dollar also surged against the greenback, up as much as 2.8 per cent after its unemployment rate fell to 5.3 per cent in December, its lowest level since 2009. FED rate rises in doubt Disappointing economic data from the world's biggest economy and the fallout from the prolonged oil price rout has stoked doubts that the US Federal Reserve can lift interest rates at all this year, let alone the four hikes it suggested when it began its rate rise cycle in December. Not that the RBA will be rushing to hit the button on rate cuts on a dollar rally against the greenback. Local economic indicators, including the labour market, which has shown recent strength, and core inflation numbers, are key to the mix.

St George Bank senior economist Janu Chan said the Australian dollar's rally on Thursday was a story about a weaker US dollar, and on a trade-weighted basis, the moves were more modest, an indicator the RBA watched more closely. "It is a moving target for the RBA, it is more concerned in relation to where [the dollar] is with commodity prices," she said. Mr Blythe said the bank expected rates to remain on hold at 2 per cent this year, but it had also slated three hikes in the US, a number the market believes is increasingly unlikely. Bond futures traders see just a 47 per cent chance the Fed will lift rates before December, down from 93 per cent at the end of last year, according to Bloomberg. Also in the mix is the threat of a currency war, sparked by the Bank of Japan's move last week to impose negative interest rates on bank deposits in a bid to keep the yen from appreciating too highly.

"The AUD/USD is being dragged reluctantly into the global FX crossfire," Su-Lin Ong, chief economist at RBC Capital Markets said. "A weaker USD amid a repricing of Fed expectations coupled with a desire from the authorities for a weaker yuan and yen is pushing the TWI [trade weighted index] in the wrong direction," she said, noting the US dollar, yuan and yen accounted for half of the Australian dollar's TWI. BNP Paribas greater China senior economist Chi Lo said the currency war could intensify this time around due to China's entry into the mix, with the People's Bank of China (PBoC) keen to move the currency's focus towards a trade-weighting basis rather than a US dollar peg. "If the renminbi does weaken against the US dollar further, courtesy of a weakening Japanese yen, Asian currencies will be dragged down further," he said. That the markets have little clue as to the policy goals of the PBoC adds to the murkiness and volatility in both Chinese and global markets, he warned.