After the war, Crace specialized in torpedoes. Following various assignments that included sea service, he became assistant to the second sea lord in 1937. A rear admiral when World War II began, he was assigned to command the Australian Squadron, in effect becoming the commander of the Royal Australian Navy (RAN). The RAN was subordinate to the British Admiralty, and Crace considered asking for another more responsible position in the Royal Navy.
After the United States entered the war, the U.S. Navy assumed overall Allied command of the South Pacific, and Crace took command of the mixed U.S.-Australian cruiser Task Force 44. In May 1942, the Allies became aware that the Japanese were preparing to invade Port Moresby, New Guinea. Along with two U.S. carrier task forces, Crace and his squadron set out to intercept the Japanese invasion force, which reconnaissance aircraft had reported as headed for the Jomard Passage. In the early afternoon of 7 May, Japanese medium bombers and torpedo-bombers attacked Crace's ships, but skillful maneuvering averted major damage at the hands of the Japanese and also from U.S. B-17s, which mistakenly attacked the friendly force.
The presence of Crace's ships and mistaken Japanese impressions as to the size of his unit led the invasion force headed for Port Moresby to turn back. Crace's ships played no other role in the Battle of the Coral Sea. They remained in the Jomard Passage for another two days, until being notified of the overall course of the battle. They then headed south and returned to Australia.
Crace received high marks from the Americans both as a seaman and as a commander of a joint force. He retired from the navy in 1942 and died in Liss, Hampshire, England, on 11 May 1968.
Hoyt, Edwin P. Blue Skies and Blood: The Battle of the Coral Sea. New York: S. Eriksson, 1975.; Morison, Samuel Eliot. History of United States Naval Operations in World War II. Vol. 5, The Struggle for Guadalcanal, August 1942–February 1943. Boston: Little, Brown, 1949.