In a surprise move, Australia became the first G-20 central bank to raise interest rates (by .25% to 3.25%), noting that the critical phase of the economic crisis was essentially over. The action spurred global stock gains; a pullback in the US dollar/a spike in the Australian dollar to a 14-month high; and a surge in gold.
“So what really happened?” asked my friend and super-anchor Tony Cruise at WHAS radio in Louisville, KY. Tony, I’m glad you asked!
The boom for natural resources took a breather during the global recession, but has returned with renewed vigor, led by China. As a result, Australia raised rates because its natural resource-rich economy has weathered the financial storm better than consumer-driven economies, like those in the US, Europe and Japan. So while the Australian central bank believed that its interest rate policy was a little too loose for comfort, don’t expect similar moves by the Federal Reserve any time soon.
Once the Aussies increased rates, the talk immediately turned to (cue the scary music) “The Death of the US Dollar“. Indeed, there are many who are predicting that the greenback will lose its status as the world’s reserve currency, but I don’t expect that’s going to happen today or even tomorrow. After all, when the world was in turmoil, where did everyone park their money? Oh yeah, in US dollar-denominated assets. We ain’t dead yet!
Right now, what I’m more concerned about is the return of a liquidity-driven asset bash. It’s only been one year since the near-total melt down of the financial system, that was in large part fueled by gobs of liquidity. Yet here we are talking about how low interest rates are pushing investors to seek higher returning assets. File this trend in the category of “lessons not learned”. As they would say in Australia, “fair dinkum, mate!”
Image by Flickr User marragem, CC 2.0
