On Thursday traders priced in a 68 per cent chance of a rate cut from the RBA up to and including the December meeting, compared with a 56 per cent chance at the same meeting a day earlier. Photo: Bloomberg

The Australian dollar broke through the US78¢ mark early on Friday morning, compounding pressure on the Reserve Bank of Australia to cut interest rates again.

The local unit rose through Thursday trade, bolstered by a more dovish outlook from the US Federal Reserve on the timing of an interest rate rise this year.

The greenback's cause wasn't helped by soft US inflation data on Thursday, which showed the core annual rate slipping back to 1.7 per cent in May, from 1.8 per cent in April.

This helped the Aussie extend gains overnight, rising as high as US78.49¢ before it dropped back to just above US78¢ at the start of the local session on Friday morning.

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The Aussie was also buoyed by a stabilisation in the iron ore price on Thursday night. The bulk commodity added 0.4 per cent to $US61.77 a tonne, ending a four-day losing streak.

But the main driver on currency markets was the Fed's signal that US rates are likely to rise at a slower pace than previously expected, which weakened the US dollar across the board. The US currency slid 0.5 per cent to $US1.1399 per euro and fell 0.4 per cent to ¥122.90. 

The euro, meanwhile, defied the ongoing uncertainty around Greece's future within the single currency.

Despite a summit by the Eurogroup finance ministers ending without a deal for the debt-plagued country, the euro rose as high as $US1.1436, its strongest since mid-May.

Reports that creditors plan to offer to extend Greece's existing aid program until the end of this year, providing the country with 10 billion euro to recapitalise banks that have been hit by capital flight, boosted the single currency, but the reports were quickly denied.

Following Thursday morning's statement from the Fed, financial markets prices in a higher chance of the RBA cutting rates by 25 basis points to 1.75 per cent. 

The move came on a more dovish outlook for Fed rate rises, which had expected to begin raising rates as early as June but is now not expected to do so until at least September.

Economists, including Goldman Sachs, responded by pushing out the timing of a change in the Fed funds rate to December from September.

Itay Tuchman, Citigroup's head of markets in Australia, described the outcome as "very, very dovish". 

"They've really raised the hurdle for a tightening in September. They've used the word 'decisive' in terms of the data they want to see," Mr Tuchman said. A long-time Fed watcher, he said when the central bank made modifications to its language, observers should consider those changes as deliberate.

On Thursday traders priced in a 68 per cent chance of a rate cut from the RBA up to and including the December meeting, compared with a 56 per cent chance at the same meeting a day earlier. But November is still the earliest RBA meeting where a rate cut is a better-than-even chance, priced as a 60 per cent probability.

"The Fed has been more patient than the RBA can be," UBS interest rate strategist Andrew Lilley said.

with Jens Meyer