The Australian dollar got a rare rally on Tuesday after the country's central bank raised rates by more than expected and signalled further moves ahead, leading investors to wager on a faster tightening in coming months.

The Reserve Bank of Australia (RBA) lifted its cash rate by 25 basis points to 0.35%, the first hike in more than a decade and larger than the 15 basis points widely expected.

That left the Aussie up 0.9% at $0.7109, and away from a three-month low of $0.7030 hit overnight. The bounce ran into profit-taking at $0.7148, however, suggesting risks were still to the downside.

The New Zealand dollar popped higher initially at $0.6474 but again soon ran into selling. It was last flat at $0.6423 , and only just above its lowest since mid-2020 at $0.6413.

Both currencies have been losing ground to the safe-haven U.S. dollar as fears of a recession in Europe and lockdowns in China undermine risk assets.

The futures market took the RBA statement as reasonably hawkish and moved to narrow the odds on a hike in June to 0.75%, rather than 0.5%.

"Does it mean that they will do 40 basis points in June, so we are up to 75 basis points? It is certainly possible," said Ray Attrill, head of FX strategy at NAB.

"It looks like their narrative and the inflation forecasts that they're hinting at comes across as fairly hawkish."

Markets have long been betting on an early tightening and rates of 2.5% by Christmas, in large part because most other major central banks have been acting with a lot more urgency.

The U.S. Federal Reserve is widely seen raising rates by half a point on Wednesday from the current spread of 0.25% to 0.5% to reach 3% or more by year end.

Yields on Australian three-year bonds shot up 14 basis points to their highest since late 2014 at 2.971%, while 10-year yields rose almost 10 basis points to 3.35%.

"The RBA has begun its tightening cycle at a faster pace than consensus and hinted at the potential for even larger rate hikes in the future if necessary," said Damien McColough, Westpac's head of rates strategy.

"That should keep the broad yield curve flattening trend in place for now. It also suggests that selling rallies remains the appropriate tactical approach."

(Reporting by Wayne Cole; Editing by Jamie Freed)