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The Aussies have it right

I should be outside enjoying the sun and the beautiful rolling hills, but I thought a tribute to the Aussie central bank was warranted. Today they raised their target rate for the third time in three months, to 3.75%. As a reward for their proactive stance against inflation, and for the fact that they have kept rates much higher than the Fed for quite some time—being more concerned about inflation than the economy—the market has bid up the Aussie dollar to a fairly strong level against the U.S. dollar, as shown in the second chart. Indeed, relative to its purchasing power parity against the U.S. dollar, the Aussie dollar is now as strong as it has ever been. As a side note, over the past three years, commodity prices have risen almost 20% in US dollar terms, but they are flat as far as the Aussie dollar is concerned. This is another way of seeing how dollar weakness in recent years has been due to easy money, with the next shoe to drop being rising inflation.

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