higher rates

What higher rates in the US actually means?

The US raises interest rates but what does it mean for Australian financial markets and that offshore Christmas holiday? Here's what you need to know.

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The ease that comes with kicking back on a sandy beach off shore, just got less satisfying after the Australian dollar fell on news that the US central bank increased interest rates for the first time since the financial crisis.

The US Federal Reserve which is headed up by chair Janet Yellen, raised the target federal funds rate by 25 basis points to between 0.50 per cent and 0.75 per cent.

Ms Yellen also signalled that three more increases will come in 2017 as the American economy continues to “progress” in the areas of employment, growth and inflation.

As a result, the Australian dollar has slipped nearly one cent to $US.74 against the greenback.

But Janu Chan, senior economist St.George Bank doubts that the local currency will go much lower anytime soon.

“The US dollar has already risen a bit and I think that can’t go much higher, which means that the Aussie dollar may not fall much further this year or next.

“That said, the Aussie dollar is quite volatile so it could overshoot but we don’t anticipate it will fall to much.”

Joanne Masters senior economist at ANZ expects the Aussie dollar to fall in 2017.

“A stronger US economy, with a more sustained recovery, is ultimately good for the global story and that’s good for Australia. Also, a stronger US dollar underpins our view that the Aussie dollar will depreciate in 2017, which should provide some stimulus to the economy.”

Popular offshore travel destinations for Australians this time of year include, Thailand, Britain and Hawaii – all of which have seen the Aussie dollar fall against these currencies in the wake of the US rate rise.

This is good news for the Reserve Bank of Australia which has been wanting to see the Australian dollar fall to help stimulate economic activity through trade and sectors likely to benefit such as domestic tourism.

The US rate rise is also likely to stall any rate moves in Australia for a little while longer, particularly as our own growth continues to falter.

“For the RBA, we remain of the view that rates will likely stay on hold for a little while but the risk is still that they will need to cut again in 2017. Long-term interest rates, as measured by the 10-year government bond, are expected to move higher,” said Ms Chan.

For many of us who follow financial markets, talk of a US rate increase has been around for years but undoubtedly it will be seen by the incoming Trump-Administration as more reason to stimulate growth by tax cuts, spending and deregulation.

Share market investors aren’t expected to like the rate rise and some commentators have started predicting a stock market correction, particularly in commodities – which could hurt Aussie resource stocks short-term.

“We have been cautious about the recent rally in the US and Australian share markets, and today’s announcement could be the catalyst for a correction over the coming months,” says
David Lane director of wealth management at Pitcher Partners.

“With a dearth of activity as the world awaits the inauguration of Trump, there’s a high likelihood of a weakness in markets.

“There are opportunities to take profits on positions that have rallied strongly, particularly in the resources market where many stocks have rallied above realistic levels.

“We would, however, view any weakness over the coming weeks as being an opportunity for adding to long-term portfolios,” said Mr Lane.

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