The Australian dollar surged to a four-month high, after comments by European leaders that they will do everything to protect the eurozone.
German chancellor Angela Merkel and Italian prime minister Mario Monti said in a statement that decisions made at the June European leaders summit must be enacted as quickly as possible, and that they would "do everything necessary to protect the euro area." The comments come on top of by the European Central Bank's president Mario Draghi that the ECB will do "whatever it takes" to save the common currency.
Most market economists and traders are interpreting this as a signal that the ECB will buy Spanish bonds to help push down interest rates on that nation's debt, which had climbed above 7.5 per cent, but have fallen below 6.7 per cent after Mr Draghi's comments.
However, many economists agree that ECB bond buying is still a short-term stabilisation measure, and will only buy time while European politicians hammer out deals on longer-term structural reforms.
"With expectations set high, the risk is clearly for disappointment," Societe Generale Europe economist Michala Marcussen wrote in a note.
"The ECB is likely to keep the markets guessing over the coming weeks in something of a game of cat and mouse." She says the ECB could buy anywhere between 20-50 billion euros of Spanish debt, which would cover most of the country's remaining requirements for the current year.
Expectations that the ECB will announce another bond buying program after its meeting on Thursday, as well as the positive comments by Mrs Merkel and Mr Monti, helped drive the Australian dollar to a four-month high of 104.97 US cents earlier this morning.
The local currency was trading at 104.6 US cents by 10:06am (AEST).