The Australian dollar was headed for its best week in seven...

The Australian dollar was headed for its best week in seven months on Friday, buoyed by hawkish domestic rate outlook and optimism about the Federal Reserve's rate pause this month, while the bond market continued to price in recession risks.

The Aussie was hanging at $0.6890 AUD=D3 , its highest in four months, after surging 1.3% overnight. It is set for a 2.2% weekly gain, the best since mid-November 2022, and way off its 2023 low of $0.6459 two weeks ago.

The kiwi trailed a little with a weekly gain of 1.8% NZD=D3 , changing hands at $0.6241. It also jumped 1% overnight after soft U.S. data, including factory production and jobless claims, challenged Fed's hawkish view of two more increases to come.

"The combination of much-improved risk sentiment and the RBA’s largely unexpected June cash rate rise has breathed life back into AUD/USD," said Ray Attrill, head of FX strategy at National Australia Bank.

Attrill says a hawkish RBA, contrasted with the limited risk for higher Fed funds rates, means the Aussie dollar can rebound to 70 cents in the second half of the year.

Australian bond yields jumped this week, with three-year yields AU3YT=RR gaining 18.6 basis points to 4.035%. Ten-year bonds AU10YT=RR only rose 7 bps to 4.035%, meaning a key part of the yield curve is about to enter inversion on fears of recession.

On Friday, the Bank of Japan kept ultra-low interest rates and forecast that inflation will slow later this year, reiterating its dovish stance, sending the yen lower.

The Aussie rose 0.4% to 97.00 yen AUDJPY=R while the kiwi gained 0.5% to 87.85 yen NZDJPY=R .