The Reserve believes the dollar is soaring because foreign investors have settled on Australia as a safe place to park their money.THE Reserve Bank has turned to ”open mouth” operations in a bid to hold back the rising Aussie dollar.
The Reserve inserted a sentence of exchange rate commentary into the statement released after yesterday’s board meeting in a conscious attempt to let the market know it thought the dollar was higher than could be justified by the usual metrics. The sentence said the exchange rate had “remained high despite the observed decline in the terms of trade and the weaker global outlook”. The Aussie-US exchange rate has climbed 6 per cent during two months in which base metal prices have fallen 6 per cent.
The Reserve believes the dollar is soaring despite the lower prices because foreign investors have settled on Australia as a safe place
to park their money. A big part of yesterday’s Sydney board meeting was given over to discussing the high dollar and what – if anything – to do about it.
One option – not ruled out – is to intervene in the foreign exchange market by selling dollars and buying foreign currency as the central bank has done on rare occasions in the past.
This option carries a risk of being stuck with foreign assets that would turn out to be bad investments, a criticism that can be levelled at China’s policy of investing abroad in order to hold back its currency.
The Reserve is taking the view for the moment that there is little evidence of broad economic damage flowing from the high dollar, meaning it can wait. Economic growth is strong, employment is climbing and inflation is low.
If needed, the Reserve would restrain the dollar in other ways, by feeding concern about the high dollar into its decisions about whether to cut interest rates; in the same way as it feeds concern about bank funding costs into those decisions.
For the moment it is watching the dollar, letting people know it is watching the dollar, and keeping its options open.
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