SYDNEY--The Australian dollar rallied to its highest levels since mid-May on Friday, as bets on a coming interest rate increase by the U.S. Federal Reserve eased somewhat.

In Asia's afternoon trading hours Friday, the Australian dollar was changing hands around 72.10 U.S. cents, up from around 67.00 U.S. cents at the start of the year.

In a speech Thursday, Fed Gov. Christopher Waller outlined a strong case for the central bank to hold interest rates steady. Waller said he was leaning toward keeping rates steady this month amid signs inflation was starting to cool.

If data next shows inflation is losing momentum, there won't be a need to raise rates, Waller said.

Financial markets reacted by lowering the odds of a rate increase to just under 50% from 65% after Waller spoke.

Fed officials will stop talking publicly about the economy and interest-rate outlook later Friday before meeting Sept. 15-16.

At the July meeting, nine voting Fed officials voted to hold interest rates steady, and three dissented in favor of a rate hike.

"The Australian dollar's latest run-up back above 72 U.S. cents is principally because of reduced expectations of Fed tightening after Waller's speech," said Ray Attrill, head of FX Strategy at National Australia Bank.

Equally, pricing for a September interest rate rise by the Reserve Bank of Australia has ratcheted up to more than 60% this week from 50%, with much of that increase coming after Wednesday's solid second-quarter economic growth data, Attrill added.

The U.S. dollar is down against nearly all major currencies since midyear as the worst-case scenarios for oil prices have played out, while U.S. employment growth has slowed, said Sean Callow, senior currency strategist at Intouch Capital Markets.

The resulting rally in the Australian dollar over recent weeks has been mostly low key, but quite relentless and with increasingly solid foundations, Callow added.

The Australian dollar has outperformed all major currencies bar the Korean won and Norwegian krone so far in the third quarter.

The currency's gains have picked up pace since the U.S. Treasury Department's surprise announcement of its bond buyback plans, which prompted a flight to gold and assets like the Australian dollar from the U.S. dollar, Callow said.

Australia's sticky inflation is also testing the patience of the RBA, bolstering the yield appeal of the Australian dollar, he added.

Financial markets expect the RBA's official cash rate will soon top 4.75%, making it one of the highest policy rates among developed economies, Callow said.

More immediately, the Australian dollar will continue to take its guide from the U.S. dollar for now, said Carol Kong, currency strategist at the Commonwealth Bank of Australia.

A stronger than expected U.S. payrolls report in coming hours could see the Australian dollar give back some of this week's advance, she added.