Australian dollar continues rally

The economy is getting back on its feet

The Australian dollar is continuing its rally of recent days and has hit a 14-month high.

The rise is due to the robust local economy, which has picked up well in the past year, and expectations of a rise in interest rates.

Brian Redican, chief economist at MacQuarie Bank in Melbourne, told the BBC's World Business Report that the currency's strength reflected the increasingly good outlook for the world economy.

An increased demand for commodities, of which Australia is a major producer, was also a contributing factor.

Direction change

That has enticed more foreign investment into the country.

Inflation however, is likely to be sitting at the top of the Reserve Bank's inflation zone - somewhere around 3%.

The rise in inflation has been boosted by a lot of one-off factors, such as the increase in insurance premiums and the levy on airline tickets.

There is now pressure on the reserve bank to lift interest rates a quarter of one percentage point.

If it does so, Australia could be changing direction ahead of the European Central Bank or the US Federal Reserve.

"The Reserve Bank of Australia has adopted a very pre-emptive approach to the Australian economy," Mr Redican said.

China ties

During his first major speech on foreign policy, the new opposition labour leader Simon Crean has called for closer economic ties with China.

"China has become a much more significant partner for Australia in terms of our export destinations over the last five years," Mr Redican said.

"Not only in terms of commodities such as coal and iron ore, but also as a destination for tourists."

He added: "Such economic ties are widening by themselves but they would be helped by some official recognition."