The Australian dollar extended losses on Thursday as talk of a hedge fund trouble sent stocks, gold and commodities in a spin, but were still able to hold near recent peaks against sterling.

The dollar edged lower to $US1.0238, from $US1.0258 early, having slipped more than a full cent overnight amid a selloff in copper, oil and gold.

It was closing in on a four-month low of $US1.0227 touched last week. A break below $US1.0220, would open the way to a retracement to $US1.0149, the October trough.

"At the moment, it's solely about US dollar strength," said David Scutt, a trader at Arab Bank Australia.

The dollar index jumped to a three-month high as rumours of a hedge fund forced to liquidate positions gave investors the excuse to cut bearish positions.

The US dollar got a further fillip when minutes of the last Federal Reserve meeting showed some members wanted to scale back bond buying before seeing a pickup in hiring.

However, analysts cautioned the reaction was overdone as the hawks were still a minority in the Fed and the more important board members remained firmly committed to QE.

Adding to the growth-linked currencies' woes were concerns that China's central bank may soon start a tightening cycle.

The dollar, however, found some support after iron ore prices scaled a 14-month high at $US158.90 a tonne.

Prices of the steel making mineral, Australia's single biggest export earner, have nearly doubled since September. The jump augurs well for the nation's terms of trade and so for profits, incomes and tax receipts.

The dollar extended overnight losses against the yen, dragged down by selling in EUR/JPY.

The dollar fell to 95.62 yen and the kiwi to 77.92 yen, both showing a fall of more than 1 per cent since Wednesday.

Arab Bank's Scutt said the pullback was largely due to one-way positioning as investors have been heavily betting on yen weakness.

The dollar, however, were still within sight of four-year peaks touched early this month.

The dollar fared better against the pound on persistent rumours the UK may lose its triple A credit rating. The pound hovered near its weakest since August at A$US1.4846.

Australian government bond futures gained with the three-year contract up 0.04 points at 97.130, while the 10-year contract rose 0.05 points to 96.490, having bounced off 10-month lows.