The Australian dollar surged on Friday but then gave back all its gains after the Chinese government unexpectedly cut interest rates.
At close of trade on Friday the Aussie dollar was trading at US72.13c after reaching a high of US72.96c immediately after the announcement.
The Peoples Bank of China slashed its benchmark interest rate by 25 basis points to 4.35%, and the deposit rate from 1.75% to 1.5%, in an attempt to breathe some life into the economy.
Although the move was initially taken as positive, investors reflected on the reason for such a move, with some predicting that the Chinese government made the move on concerns of overall growth, which sent the Aussie dollar tumbling.
The cut in rates has also raised speculation that a rise in interest rates from the US Federal Reserve may be back on the table in December, as the Chinese move would boost growth and take away some of the Fed’s worries of a lagging economy.
From the Reserve Bank of Australia’s point of view it may be a sign that there is panic setting in about the rate of growth in the nearest future, and they may need to act by cutting interest rates in order to boost the local economy.
The Australian housing market also seems to be cooling down which will also give the RBA more room to lift rates as the booming property sector had been one of the main reasons that the central bank held of reducing interest rates again for so long.
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