Aussie at 11-month high on hawkish RBA; bonds down

* Central bank says normal rates well above current levels

* Aussie dollar gains as chance of Q4 rate hike rises

* Bond yield curve flattens, biggest shift in 8 weeks

SYDNEY, Aug 14 - The Australian dollar hit a near 11-month high on Friday as speculation of eventual interest rate hikes hit a new pitch after the central bank chief said normal rates would be a lot higher than the present level.

Reserve Bank of Australia chief Glenn Stevens said on Friday the current record low rate of 3 percent was an "emergency" level, and that a normal level was "a good deal north" of that [ID:nSYD342603].

His hawkish comments pummelled bond futures, while lifting the Aussie <AUD=D4> to a high of $0.8479, from $0.8385 seen here late Thursday. By early evening, it had retreated to $0.8426.

It was down slightly on the yen at 80.21 yen <AUDJPY=>, from Thursday's 80.69.

"Stevens was blunt in his suggestion that it was 'a good deal north' of the current level," said Patrick Bennett, a Societe General analyst. Bennett said Australian rates could rise 150 basis points by June next year, and maybe even earlier.

Three-year bond futures <YTTc1>, which are sensitive to changes in the short-term rate outlook, lost 0.02 points to 94.90. September bill futures <0#YBA:> eased 0.01 point to 96.54.

Australia's economy has shown remarkable resilience as aggressive rate cuts, generous government handouts and firm demand from China supported consumption and key commodity exports.

As such, the RBA, has started saying in recent weeks local rates need to normalise as Australia's economy recovers. Stevens has warned that low rates risked inflating a housing bubble.

October interbank futures <0#YIB:> fell 0.03 points to 96.895, implying investors were eyeing a one-month rate of 3.105 percent. November interbank futures show an implied one-month rate of 3.275 percent.

One-year Australian overnight index swaps <AUDOIS> climbed to a nine-month high of 3.86 percent.

The local yield curve flattened dramatically, with the spread between 10-year cash yields <AU10YT=RR> and three-year cash yields <AU3YT=RR> narrowing to 69 basis points, the biggest daily decline in eight weeks.

But some analysts cautioned that rate hike expectations may be a little overdone given the risk that the economy disappoints in coming months as the boost from the government's handouts wears off.

"The market has become too aggressive in its pricing for rate hikes by fourth quarter," said David Forrester, an analyst at Barclays Capital.

"As the effects of the fiscal stimulus lessen in the coming months, the data will weaken and lead the market to push back its expectation of rate hikes to early 2010," he said. ----------------(Snapshot at 4:00 p.m./0600 GMT)---------------- FUTURES CASH YIELD 90-DAY BILL 90-DAY BILL<YBAc1> (SEP) 96.54 (-0.01) AU3MBB=RR 3.30 (3.28) 3-YR BOND <YTTc1> (SEP) 94.90 (-0.02) AU3YT=RR 4.98 (4.96) 10-YR BOND <YTCc1> (SEP) 94.41 (+0.075) AU10YT=RR 5.68 (5.75) AUD/USD <AUD=> 0.8426 (0.8395) US10YT=RR 3.61 (3.72) ---------------------------------------------------------------- AUD VS 2-YR 10-YR *AUD 3-YR/10-YR SPREAD USD +347 (+335) +206 (+202) *FUTURES +0.49 (+0.58) CAD +324 (+319) +218 (+213) *AUD 2-YR/10-YR SPREAD NZD +51 (+49) -25 (-21) *CASH +111 ----------------------------------------------------------------