The Australian dollar climbed to its highest since August 2008 after the central bank raised borrowing costs, the first interest-rate increase among the Group of 20 nations, boosting demand for the country's assets.
''This is going to provide tremendous support for the Australian dollar because this is likely to be the start of a series of rate hikes,'' said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. ''The Aussie risks going over 90 (US) cents over the next 24 to 48 hours, particularly if this negative US dollar sentiment gathers momentum.''
Australia's currency rose as high as 88.66 U.S. cents, the most since Aug. 11, 2008, before trading 1 per cent stronger at 88.64 cents as of 4:12 p.m. in Sydney, from 87.79 cents in New York yesterday. The Australian dollar advanced 0.5 per cent to 79.02 yen.
At the local 5 p.m. close, the Aussie dollar was even strong buying 88.75-78 US cents, up from Monday's close of 87.34/39 US cents.
Reserve Bank of Australia Governor Glenn Stevens increased the overnight cash rate target to 3.25 per cent from 3 per cent in Sydney today. Only one of 20 economists surveyed by Bloomberg News forecast today's decision. The rest predicted no change.
''The risk of serious economic contraction in Australia'' has now passed, Stevens said in a statement. ''The board's view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,'' he said.
Benchmark interest rates in Australia and New Zealand, which has a target rate of 2.5 per cent, compare with 0.1 per cent in Japan and as low as zero in the US. That attracts investors to the two natons' higher-yielding assets. The risk in such trades is that currency market moves will erase profits.
Both nations' currencies earlier advanced as the UK-based Independent reported that oil-producing Arab nations are seeking to move to a basket of currencies, including the yen, the yuan, the euro and gold to settle transactions.
''That article would have contributed to the depreciation of the US dollar, especially as it comes on the heels of talks in recent weeks and months that the world should move away from having the greenback as a reserve currency,'' said Besa Deda, chief economist at St. George Bank Ltd. in Sydney.
''The Australian dollar will struggle relative to other risk currencies like the New Zealand dollar, Canadian dollar and British pound,'' said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world's largest foreign-exchange trader. ''The good news that the RBA has reacted to doesn't seem as priced into those currencies as it currently is in the Australian dollar.''
The so-called Aussie earlier slipped by as much as 0.2 per cent today after the Bureau of Statistics said Australia's trade deficit narrowed to $1.52 billion in August, wider than the $900 million forecast by economists.
Australian government bonds rose. The yield on 10-year notes fell one basis point, or 0.01 percentage point, to 5.19 per cent, according to data compiled by Bloomberg. The price of the 5.25 per cent security due March 2019 climbed 0.063, or $0.63 per $1,000 face amount, to 100.421.
Bloomberg News