Iron ore's euphoric rise is a short term sweetener for iron ore producers in Australia and may provide further support for the Aussie but analysts are skeptical it will stay elevated.

The spot price of iron ore surged 7.2 per cent, or $US4.97, to near $US74 a tonne during Tuesday's session as Chinese authorities inspected local, low-grade steel mills.

Local futures traders reacted dramatically to the prospect of tighter steel supply, following Chinese Premier Li Keqiang's reiteration that low-quality producers will be shut down.

"Can prices surge higher from here? Of course they can," says Glyn Lawcock, managing director of resources research at UBS.

"But we don't see this as a sustainable move higher in the longer term. It's important to remain cognoscente that the futures markets in China are heavily influenced by retail volume, and they respond quite rapidly and strongly, in both directions, to newsflow."

About 70 per cent of the Dalian market is retail and, thanks to the proliferation of smart phones, there is a frenzy of individual investors trading everything from iron ore future to cotton and eggs.

But there is optimism that the Chinese economy is performing better than previously thought. Government spending on infrastructure and widespread property investment, despite a regulatory clampdown, saw China's PMI sub-index construction gauge jump to 62.5 from 61.4 in June.

As such, Goldman Sachs last week lifted its three-month iron ore forecast to $US70 a tonne from $US55, and the year-end target by $US5 to $US60.

"There's has been some underperformance from some of the majors as well, which is contributing to this price hike," says Paul Young, resources analyst at Deutsche Bank.

"But we see iron ore drifting between the $US50 and $US70 band, and when you get north of that a lot of high cost swing supply is in the money, so our view is that the market will then rebalance and the price will come off."

Resource giants BHP Billiton and Rio Tinto burst out of the gates on Tuesday morning; the miners trading more than 1 per cent higher apiece.

Fortescue Metals was trading up 0.5 per cent, while Atlas Iron enjoyed a 4.7 per cent boost.

"Although the price may move around, we still see there being a very large requirement for iron ore in the future," says Mr Lawcock.

"So we are expecting more capital to head into the mining industry in Western Australia for example, and overall a higher price is healthier for the Australian budget overall."

While investors are pouring into iron ore stocks on the back of this week's jump, many are wary about a parallel rise in the Aussie dollar, which complicates things for exporters.

Since the beginning of June, the Australian dollar has soared 8.7 per cent and is hovering above US80¢ on Tuesday morning.

"This rally in iron ore is just another boost for the local currency," says Janu Chan, an economist at St Geroge.

"But it's not just iron ore, there's been a broad recovery in commodity prices, like copper, oil has firmed and commodity prices go in hand with US dollar weakness."

Traders are jostling for position on Tuesday, ahead of the Reserve Bank of Australia's decision on interest rates, and are expecting the central bank to talk down the Australian dollar strength.

"We think in the near term the Aussie has probably gone a bit too far, but markets are preparing for interest rate rises from others apart from the US Federal Reserve, that's quite a shake up for global markets," says Ms Chan.