Australia's dollar reached the strongest in 23 years last month as the central bank raised interest rates to an 11-year high of 6.75 percent. Federal Reserve rate cuts widened the Southern Hemisphere nations' rate advantages over the U.S. to a 2 1/2-year high.
The Australian dollar was at 88.17 U.S. cents at 4:19 p.m. in Sydney from 87.61 cents late in New York on Dec. 28. The currency gained 12 percent this year from 78.86 cents at the end of 2006, its second annual gain.
The Australian Dollar traded near the strongest in two weeks as traders bet Australia's 2.5 percentage point rate advantage over the U.S. will widen. Traders raised the odds of a fourth consecutive interest-rate cut by the Fed after a report on Dec. 28 showed sales of new homes in the U.S. fell to a 12-year low.
The Reserve Bank of Australia will increase borrowing costs in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps.
The Australian dollar completed an annual gain against the yen. The Australian dollar rose for a third straight year, as investors increased so-called carry trades. Australia's dollar climbed 5.2 percent this year to 98.75 yen, from 93.91 yen at the end of 2006.
Australia's currency in October reached the highest since 1991 against the yen. It has declined from those levels as rising defaults in U.S. subprime, or high risk, mortgages sparked a reduction in the amount of credit worldwide and slashed earnings for financial stocks.