THE Australian dollar appears headed towards parity with the US dollar after Reserve Bank governor Glenn Stevens agreed the economy's strength could drive it"way up" to $US1.10.
The dollar jumped after Mr Stevens also suggested that the Reserve Bank would not be “too timid” in further increasing the official interest rate, breaking through US92c to reach 14-month highs.
His comments startled foreign exchange market analysts and encouraged money markets to bet that the Reserve would lift its cash rate from 3.25 per cent to at least 3.75 per cent before Christmas and keep lifting next year.
“I tend to agree with him,” the Commonwealth Bank’s chief currency strategist, Richard Grace, said of Mr Stevens’s Aussie dollar bullishness.
But while Mr Stevens suggested the dollar’s rise was the result of Australia’s economic vigour, Wayne Swan warned that it would hurt farmers and other export industries.
“I do understand some people will do it really tough as a consequence of a higher dollar,” the Treasurer said.
Since October 2, just before the Reserve Bank lifted its 3 per cent “emergency” cash rate, the dollar has gained nearly 7 per cent, from US86c to US92.11c in European trading last night.
The dollar’s rise could further increase the tension between the Reserve Bank’s rate rise move and the Rudd government’s rejection of calls to unwind its budget stimulus more quickly.
In theory, an expansionary budget policy pushes up an economy’s exchange rate.
The Reserve Bank is not intervening in foreign exchange markets to dampen the currency’s ascent, which is akin to a policy tightening that mostly hits exporters and businesses that compete against imports. But it also contains inflation by making imports cheaper.
The Australian sharemarket rose again yesterday on the back of improved investor confidence in the Australian and global economies, with the All Ordinaries index gaining 28.5 points or 0.59 per cent to hit a one-year high.
Mr Stevens was asked at a breakfast function in Perth whether the Reserve Bank had any tools to prevent speculators driving the Australian dollar to $US1.10.
Mr Stevens replied that, rather than speculators, there usually was a rational reason for big exchange rate movements.
“You could do a scenario where the exchange rate goes way up,” he said.
“We’ve got one of the better-performing economies in the world. Even at very low interest rates, we still have a positive differential and we’re a country where the people here are, I think, reasonably confident about the future and foreigners are fairly confident about our future, and it’s not entirely surprising that they’re a bit keen on the currency.”
Mr Stevens suggested that this could change if economic recoveries in other countries surprised on the upside.
“But you could do a scenario of the one you suggest and, in that world, perhaps inflation is lower, but the reason the exchange rate is up there is probably that there are some very strong growth dynamics and trade dynamics at work here.”
The Australian dollar has not traded at parity with the US dollar since the local currency floated in late 1983, but appeared headed towards this level before the global crisis hit.
