Australia, on Tuesday, became the first of the G-20 nations to hike interest rates when the Reserve Bank of Australia raised the cash rate from a 49-year low of 3% a quarter point to 3.25%.
As you might guess, the Australian dollar surged to a 14-month high against the U.S. dollar, trading at $0.8868 against its U.S. counterpart.
While this move surprised many analysts who expected the Australians to keep interest rates unchanged, Rory Robertson of Macquarie Research told the Financial Times that strong housing demand may have triggered the move. He added that "The RBA is recalibrating policy now that the big recession it feared was nipped in the bud by the happy combination of good luck and good management."
Australia's trading with China is back on trend and is likely to continue, albeit modestly. Inflation is close to target and the risk of serious contraction has now passed.
The central bank cited the resumption of global growth in its statement.
Overall, what we have is an economy that has survived the recession and is growing stronger. Raising interest rates modestly is a signal that growth will continue into next year. And as previously noted, a strong economy signals a stronger currency, which explains the strengthening of the Australian dollar vs. the U.S. dollar.
Do you believe that other countries will follow suit?
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