The Australian dollar steadied near three-month highs against the US dollar in choppy trade on Tuesday after the central bank raised interest rates to an 11-year high, as expected, to cool inflationary pressures.
Gains were capped after the Reserve Bank of Australia (RBA) said it would await more evidence to see whether monetary policy was restrictive enough, dousing speculation it could lift rates again in March.
Analysts said, while the RBA retained a hawkish bias, the latest statement meant it was unlikely to move before the first-quarter consumer price report in late April. "The hawkishness needed to give the Aussie dollar a further leg up was not there," said John Kyriakopoulos, currency strategist at National Australia Bank. "In the near term, the Aussie will continue to benefit from widening rate differentials over the US, but much of it also depends on risk appetite."
The Aussie was at $0.9066/71 against the US dollar, up from $0.9059/64 before the decision, but still below a fresh three-month high of $0.9102 struck offshore. It firmed to 96.81/91 yen from 96.56/66 yen on Monday, as the rate decision outweighed risk aversion stemming from fresh credit market jitters. The Aussie has advanced in recent sessions against the US currency on the back of a rise in commodity prices, robust domestic data and widening interest rate differentials over the United States.
Rates in the United States fell 125 basis points last month and sharply diverging monetary policy outlooks have seen the gap between Australian and US two-year yields blow out to 470 basis points, levels not seen in more than a decade.
The RBA also said the global credit crunch and fears of a US recession could lead to below-trend global growth this year. Australia, a big exporter of natural resources, has been riding a global commodities boom which has shored up its terms of trade, and risks of a slowdown could impact demand.
"The RBA was even-handed on the outlook," said Stephen Roberts, chief economist at Lehman Brothers. However, RBA Governor Glenn Stevens emphasised that only a "significant slowing" in demand was likely to contain inflation.
Robust demand in the domestic economy was underlined by data on Tuesday showing a 1.6 percent jump in retail sales for the fourth quarter, easily topping forecasts of a 1.1 percent rise and pointing to strong economic growth in the quarter.