Higher Interest Rates in China Weaken Australian Dollar

The Australian dollar declined against the euro after China’s central bank increased its interest rates, causing speculation that China may intensify its attempts to curb the inflation. The Australian currency posted small gains versus the US dollar and the Japanese yen.

The People’s Bank of China raised its key one-year lending and deposit rates by 25 basis points to 5.81 percent on December 25th. The higher interest rates will likely decrease the spending and imports in China. That’s bad for Australia as China is the nation’s largest trading partner and one of the biggest markets for the Australian exports.

The analysts expect more aggressive rates hikes from China in the future. According to the opinion of some economists, China may increase the rates up to three times in the first half of 2011 and by the end of that year the benchmark lending rate will advance to 6.56 percent.

EUR/AUD traded near 1.3111 as of 16:18 GMT today after opening at 1.3086 and declining to the intraday low of 1.3064. AUD/USD rose from 1.0012 to 1.0030. AUD/JPY traded at 83.13, rising from the opening rate of 83.02 and the intraday low of 82.82.

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