It dropped nearly US1¢ in the hour after the Reserve Bank announced it was lifting the target for the official cash rate to 3.25 per cent.

After edging up from there, it took another hit when European trading opened last night, selling at US89.50¢.

It had traded as high as US90.94¢ just before the rates announcement.

Ironically, it was the high dollar that dissuaded the RBA from going for a half-percentage-point rise, according to St George Bank market economist Amanda Tan.

The dollar's strength meant a quarter percentage point was all that was needed to stem inflation.

"[The RBA] noted that 'the rise in the exchange rate is likely to constrain output in the tradeables sector and dampen price pressures'," Ms Tan said in a note to clients.

"In other words, the high Australian dollar could be argued to have done part of the central bank's job."

The RBA's accompanying statement did not give a strong indication of whether rates would rise again before Christmas, Ms Tan said, and this was dampening offshore enthusiasm for the dollar.

Money market analysts, who forecast future borrowing costs, expect interest rates to reach 3.75 per cent in December and 4.5 per cent by June 2010, according to St George's economics team.

ANZ and Commonwealth Banks were the first to raise their interest rates yesterday, prompting the Federal Government to remind mortgage payers that low interest rates were a sign of a distressed economy.

Commonwealth Bank shares gained 37¢ to $51.28 while ANZ lost 1¢ to close at $22.58.

Westpac, which will announce its full-year earnings today, fell 16¢ to $25.43 and NAB gave up 51¢ to $$28.39.