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SYDNEY - The Australian dollar closed 4.25 per cent firmer as an unprecedented US rate cut boosted the appeal of the local currency.

The US Federal Open Market Committee (FOMC) lowered the federal funds rate, the rate banks lend to each other, from one per cent to what was described as a "target range" of between zero and 0.25 per cent.

At 1700 AEDT, the Australian dollar was trading at US$0.6980/85, up 2.85 US cents from Tuesday's close of US$0.6695/00.

During the day, the local unit traded between a morning low of US$0.6907 and a late afternoon high of US$0.7019.

It was the first time the Australian dollar had touched US$0.7000 since October 20 this year.

The US Federal Reserve's monetary policy arm said the outlook for economic activity had "weakened further" since its previous meeting on October 29, and pressure on inflation had "diminished appreciably".

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the FOMC said in a statement.

Senior corporate dealer with online currency trading firm OzForex Euan McCreadie said the Australian dollar received a boost from the FOMC's historic move to the US Federal funds rate.

"The US interest rate going down to 25 basis points has helped the Aussie immensely," he said.

"It briefly poked its head above 70 cents briefly."

Mr McCreadie said the increase in the interest rate differential between the key interest rates in Australia and the US benefitted the domestic unit.

With US interest rates at historic lows, the overnight cash rate in Australia was 4.25 per cent, which was attractive for investors searching for better yields in the tough economic climate.

"Short-term you might see that beneficial for the Aussie and it creep a little bit higher," he said.

"Obviously when we go into next year when the RBA gets together and slashing rates again in February and March, the interest rate differential will be less attractive.

"You will probably see the Aussie probably drift off then."

The Australian dollar could push above US$0.7000 in the late Asian trade and into the European session, Mr McCreadie said.

"It does look like it has a bit more legs in it tonight," he said.

"In the short-term the Aussie momentum is definitely north."

CURRENCY TABLE:
CURRENCY SPOT PREVIOUS CLOSE
AUD/USD 0.6980-85 0.6695-00
AUD/JPY 61.95-02 60.48-55
AUD/EUR 0.4945-53 0.4879-86
AUD/NZD 1.1998-17 1.1991-17
AUD/GBP 0.4459-68 0.4372-80
EUR/USD 1.4104-13 1.3715-18
USD/JPY 88.74-79 90.35-37
EUR/JPY 125.21-26 123.92-97



- AAP