The Australian dollar soared on Tuesday after the country's central bank raised interest rates for the 12th time and warned more tightening might be needed, with bond yields jumping as markets moved to price in a higher peak rate.
The Aussie climbed 0.8% to $0.6698 after the Reserve Bank of Australia (RBA) lifted rates by 25 basis points to 4.1%, bringing its tightening since May last year to an eye-watering 400 basis points.
Markets as well as a majority of economists had been narrowly favouring a pause, although many acknowledged that it would be a close call.
RBA Governor Philip Lowe said the hike was to provide confidence that inflation will return to target by mid-2025 when the central bank has forecast the headline inflation would return to the top of its target range of 2-3%.
He also warned that even more tightening might be required to ensure that inflation returns to target.
"With increasing public and non-public sector wages, higher monthly CPI, increasing property prices and still buoyant retail sales, the battle is ongoing. Rates could be set to stay higher for longer," said Russel Chesler, head of investments at VanEck.
"Given the RBA’s mandate, the central bank may have no choice but to hike rates even higher than markets have anticipated."
Markets are now pricing in a 60% chance of another hike in July.
Yields on three-year yields jumped 11 basis points to 3.656%, the highest since February, and 10-year yields climbed to 3.807%, the highest since early March.
The New Zealand dollar lagged at $0.6096, as the Aussie dollar rose 0.5% to NZ$1.0952, the highest since February, a reversal of fortunes after the Reserve Bank of New Zealand signalled hikes were over.
(Reporting by Stella Qiu; Editing by Kim Coghill)