Wednesday, May 03, 2006


Rate Hike Boosts Aussie Dollar

Bloomberg has this on the Australian rate hike. "The Australian dollar climbed to its strongest in seven months, in the biggest fluctuation of any currency today, after the central bank unexpectedly raised interest rates a quarter percentage point to a five-year high. Australia's currency is the world's best performer in the past month, rising 7.4 percent."

"Seventeen of the 21 economists surveyed by Bloomberg failed to predict the country's first rate increase in 14 months. Central bank Governor Ian Macfarlane said in a statement he raised rates on concern that quickening world economic growth and record commodity prices would spur inflation."

"The currency reached 76.88 U.S. cents, the highest since Sept. 22, before trading at 76.84 cents at 4:45 p.m. in Sydney. It was at 76.13 cents immediately before the decision and 76.20 cents in late New York trading yesterday."

"The yield on two-year government bonds, the most sensitive to changes in interest rates, rose 4 basis points, or 0.04 percentage point, to 5.68 percent. The yield earlier reached 5.72 percent, the highest since December 2003. The gap in yield between the two-year bond and like-dated U.S. Treasuries widened to a three-month high of 78 basis points from 73 basis points yesterday. The difference has averaged 1.01 percentage points in the past year."

"'The most likely outcome is that the market will price in a second RBA rate hike and the Australian-U.S. bond spread will widen further,' said Richard Grace, senior currency strategist at Commonwealth in Sydney. 'This will lift the Australian dollar whether or not the RBA delivers.'"

"Gains in the Australian dollar have also been driven by higher prices of commodities the country sells overseas. Sales of gold, copper, zinc and other raw materials contribute about 10 percent to Australia's gross domestic product. Australia is the world's second-largest producer of gold which has climbed 22 percent since Jan. 9 to a 25-year high. Copper and zinc, used in building and manufacturing, have gained 59 percent and 66 percent respectively this year."

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