The Reserve Bank of Australia became the first G20 central bank to raise interest rates today, increasing its policy interest rates by 25 basis points to 3.25%. Of course, Australia has done very well through the financial crisis, relatively speaking. It's banks have remained pretty strong, China has continued to demand Australia's commodity exports, and Australia has only had one quarter of negative GDP growth. (Australia's real GDP fell 2.8% at an annual rate in 2008Q4. while in the United States, recessions are declared by the NBER Business Cycle Dating Committee, many countries simply consider a recession to be in effect after two consecutive quarters of negative economic growth.)
The RBA's decision to raise interest rates resulted in a drop in the dollar. With Australia raising interest rates, investors know that there are assets out there where they can get higher returns, so low-yielding Treasuries don't look like such a good deal, despite their safety. The decision is also a vote of confidence in the world economy, which could increase investor's expected returns on assets other than Treasuries. As Australia and other countries (possibly Korea?) start raising interest rates ahead of countries like the United States and Japan, keep your eye out for a revitalization of the carry trade, where investors borrow in countries with low interest rates, and invest in countries with higher interest rates.
I have worked in economic policy and research in Washington, D.C. and Ghana. My husband and I recently moved to Guyana, where I am working for the Ministry of Finance. I like riding motorcycle, outdoor sports, foreign currencies, capybaras, and having opinions.