The Australian dollar is set to decline more than 6 per cent to around the "high 60s" level versus the greenback as the country loses its yield advantage over the US, according to Goldman Sachs Asset Management.

Australia's interest-rate premium to the US will evaporate by the middle of next year as the Federal Reserve continues to tighten policy while the RBA keeps its benchmark at 1.5 per cent, said Philip Moffitt, Asia-Pacific head of fixed income at the investment manager.

The Aussie has declined almost 3 per cent this quarter, underperforming its Group-of-10 peers. It's currently trading at US74.20¢.

"One of the reasons why people buy Aussie dollars is it has been a relatively high yielder," said Moffitt. "That's changing. More exposure to China, no rate movement here and rate convergence with the US suggest the Aussie will go lower."

The extra yield that Australia's 10-year bonds offer over similar-maturity Treasuries has dropped to just 18 basis points, near a 16-year low reached last week.

The last time the gap was consistently that narrow was in 2001, when the Aussie touched its post-float low of US47.76¢. 

But ANZ head of forex research Daniel Been noted that at the time the bursting of the internet bubble had led to a rush out of riskier assets, punishing the Aussie more than other currencies.

"We do not think that the current narrowing in spreads can, in isolation, drive the AUD back below US70¢," Been said in a note to clients yesterday.

"The evolution of global liquidity and the reaction of risk markets will be the key determinant," he said, tipping the Aussie will hold above US70¢.

Still, hedge funds and other large speculators have unwound almost all of their bullish Aussie wagers, slashing them to the lowest since January, US Commodity Futures Trading Commission data show.

Prices of iron ore have tumbled 27 per cent this year as concerns flare over the outlook for burgeoning global supply and a potential slowdown in demand in China, the largest user.

The RBA is hamstrung. While it needs to support a weak jobs market, red-hot housing in Sydney and Melbourne constrains it from deploying its already limited rate ammunition. In the meantime, the Fed is set to raise rates at least two more times this year, Moffitt said.

"It's quite likely that in 12 months Aussie short rates and US short rates could be basically the same level as the Fed tightens and the RBA does nothing," Moffitt said. "That's going to be a hard environment for the Aussie dollar to be strong."