The Australian dollar held firm against the yen on Tuesday, as pressure grew for the Bank of Japan to ease policy aggressively Later this week.

The dollar bought 88.58 yen, having scaled a 19-month peak around 89.01 a day earlier.

Responding to pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation, the Bank of Japan will ease monetary policy this week and consider adopting a 2 per cent inflation target no later than in January, sources said on Tuesday.

Risk sentiment was also supported by signs of progress in US fiscal talks. Economists have warned that going over the fiscal cliff could push the world's biggest economy into recession.

That helped the Aussie dollar hold its ground against the greenback at $US1.0542, within easy reach of a three-month high of $US1.0585 set last week. Support was found around $US1.0485, the 23.6 per cent retracement of its Oct-Dec rally.

Markets paid only passing attention to minutes of the Reserve Bank of Australia latest policy meeting, which showed the rate cut on Dec. 4 was a much closer call than the done-deal scenario many had assumed.

"Effectively the Board brought forward a potential rate cut in February to the December meeting. This means a fresh case has to be made for yet another cut in February," said Robert Henderson, chief economist markets at National Australia Bank.

"They need ongoing confirmation that the outlook for inflation remains contained to cut further."

Investors continued to factor in a 60 per cent chance of a quarter point easing to 2.75 per cent in February, when the central bank next meets. Markets implied the cash rate could fall to 2.5 per cent or lower in 2013.

The dollar was aided by a further rise in prices for iron ore to a five-month high of $US132.20 a tonne, up no less than 52 per cent from the lows touched in September. It is now back at the levels held in June before a slide sparked premature talk of an end to the mining boom.

The rally owes much to demand from China where iron ore imports were at a two-year high in November. The steel-making ingredient is Australia's biggest export earner and, if prices stay up here, it should bolster the terms of trade.

Australian government bond futures were softer, with the three-year bond contract down 0.025 points at 97.210. The 10-year contract touched a four-month low at 96.625, edging closer to the August trough of 96.560.

Reuters