By Gregor Stuart Hunter SINGAPORE, Dec 9 (Reuters) – The Australian dollar strengthened after the Reserve Bank of Australia kept rates on hold, as markets counted down to the U.S. Federal Reserve's policy meeting later this week. The Australian currency advanced 0.2% to $0.6639 after the central bank held interest rates for a third consecutive month at 3.6%, as widely expected, and warned that a pickup in inflation could be persistent. "The RBA didn't try to tamp down hawkish market expectations," said Sim Moh Siong, currency strategist at Bank of Singapore. "What was said in the meeting matches the market expectations that the RBA has tilted a bit more on the hawkish direction." The currency extended gains as RBA Governor Michele Bullock said in a press conference that more rate cuts were not needed. The yen firmed up in Asian trading after a powerful 7.5-magnitude earthquake struck Japan's northeast overnight, adding to the risk-averse mood ahead of the Fed meeting and expected policy decisions from several other central banks, while an auction of five-year government bonds attracted robust demand. The yen was last 0.1% stronger against the U.S. dollar at 155.82 yen after the quake, which prompted evacuation orders and tsunami warnings that were downgraded to advisories hours later. "The initial shock immediately revived memories of supply-chain fragility, potential insurance losses, and disruption to critical industrial output," said Tony Sycamore, market analyst at IG in Sydney, noting the anxiety was adding to the "risk-off tone" on markets. Markets are anticipating a rate cut from the Fed, and preparing for several more central bank decisions before the weekend. The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, was last flat at 99.041. Bond investors are dialling back expectations of rate cuts in 2026 as scepticism mounts that Kevin Hassett, the frontrunner to succeed Jerome Powell, whose eight-year term as Fed chair ends in May, will prove as dovish as hoped by U.S. President Donald Trump. Nevertheless, markets believe policy easing from the U.S. central bank this week is a near-certainty, with attention turning to the outlook for the year ahead. Fed funds futures are pricing an implied 89.4% probability of a 25-basis-point cut at the Fed's two-day meeting starting on December 9, according to the CME Group's FedWatch tool. The yield on the U.S. 10-year Treasury bond was last trading at 4.1702%, unchanged from late U.S. levels, after a three-day rise in yields to the highest in almost three months. "Markets made a dash for higher rates, and the new levels seem justified based on fundamentals," analysts from ING wrote in a research note. The euro stabilised following a selloff in bund markets on Monday, after ECB board member Isabel Schnabel told Bloomberg News that the European Central Bank's next move may be an interest rate hike, rather than a cut as some expect, but added that it would not happen in the near future. The European common currency was last trading up 0.1% at $1.1645. The Chinese yuan trading offshore in Hong Kong appreciated 0.1% to 7.0684 yuan against the dollar, as markets deemed the statement from the latest Politburo meeting released on Monday indicated that policymakers showed little urgency to roll out additional stimulus measures. The British pound was last 0.1% stronger at $1.3328, while the New Zealand dollar was up 0.2% at $0.5786. Cryptocurrencies sold off, with bitcoin last down 1.5% at $89,946.76 and ether= tumbling 1.6% to $3,097.81. (Reporting by Gregor Stuart Hunter; Editing by Sonali Desai and Kate Mayberry)
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