The Australian dollar is "massively undervalued" and will surge nine per cent in the first quarter of 2007, analysts have said, following gains of 3.5 per cent over the past month.

On the foreign exchange markets early today the pound fell from near 16-month highs against the euro, from 66.85p to 66.94p and was trading at $1.9042 on the US dollar.

Gambling that the Reserve Bank of Australia will raise interest rates next week and is almost certain to do so again next year traders pushed the AUS$ to near its 2006 high.

Stephen Koukoulas of TD Securities said that the AUS$ still had the capacity to rise further as record export commodity prices have not yet been factored into its value.

"The Australian dollar is a very strong buy, even allowing for the solid gains in the past weeks," he wrote in a client note, reports Bloomberg.

The AUS$ was trading at 77.20 US cents in Sydney yesterday and will climb to 80 cents by the year end and 84 cents by the end of the first quarter, he predicted.