Australia cuts rates to record lows, Aussie falls sharply before bouncing back

The Australian dollar rose on Tuesday after the central bank cut interest rates for the second time this year. However, fairly optimistic comments from the central bank are sparking speculation the move could be the last for a while.

AUD/USD was at 0.7887, up 0.64%, while USD/JPY changed hands at 120.13, flat, in holiday-thinned trade.

Meanwhile, the benchmark S&P ASX 200 enlarged gains to 1.13 percent, from 0.3 percent. 

The AiGroup April services index fell 0.5 point to 49.7 in April, down from 50.2 in March.

The central bank referred to moderate prices ahead as providing the chance to cut, but the market likely saw the move as an economic boost and took the currency higher even as Governor Glenn Stevens said further fall in the Australian dollar is likely and necessary.

Capital Economics, however, believes the central bank is not done.

"Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5 percent by December," Paul Dales, chief Australia & New Zealand economist at the research firm, wrote in a note.

Australia's economic growth "will slow from 2.7 percent last year to just 1.8 percent this year, due to the lagged effects of the sharp fall in commodity exports." Thus, "the cut in interest rates today is unlikely to be the last in this cycle," CNBC refers to Mr Dales as saying.

The economy of Australia has been hurt by a steep fall in commodity prices, as well as weak external demand and persistently high unemployment.