FIVE THINGS YOU NEED TO KNOW ABOUT THE US RATE HIKE
WHAT HAPPENED?
In a widely anticipated move, the US Federal Reserve raised its interest rate for the first time in almost a decade.
The federal funds rate rose a quarter of a percentage point to a range between 0.25 per cent and 0.5 per cent.
By comparison Australia's cash rate is at record low two per cent.
WHY?
In 2008, at the onset of the global financial crisis, the Fed slashed its interest rate to near zero from 3.5 per cent in an attempt to stimulate the economy.
After creating 5.5 million jobs in two years, the US economy is emerging from the "great" recession and is expected to grow in the year ahead.
That allows the Fed to raise its interest rate from emergency levels to more normal ones to help keep inflation under control.
WHAT DID THE AUSSIE DOLLAR DO?
It fell after the Fed's announcement, bottoming out at 71.77 US cents, but then bounced above 72 US cents.
The Aussie has lost a third of its value in the past two years, mostly because of speculation the Fed would hike its rate.
AMP Capital chief economist Shane Oliver said the dollar's muted reaction was because the Fed said any further increases would be gradual.
"With the Fed undertaking a dovish rate hike there is a risk that a further fall in the Australian dollar will be further delayed," he said.
AND THE AUSTRALIAN SHARE MARKET?
It surged because traders saw the decision to raise the US interest rate as a positive.
"The market is reacting well to the Fed's decision, which reflects the strength in the US economy," IG's market analyst Angus Nicholson said.
WHAT ABOUT AUSTRALIAN INTEREST RATES?
Another cut looks less likely after two months of strong local jobs figures.
Dr Oliver said if the Fed's rate hikes are gradual, then the RBA might need to cut again to help push the Australian dollar lower to stimulate the economy.
But if the Fed becomes aggressive with its rate rises the Aussie could fall to around 60 US cents next year, making an RBA rate cut less likely.
The RBA last lifted rates in November 2010, while its most recent cut was in May this year.
