Strong Australian dollar threatens economy after reaching two-year high

THE Reserve Bank may have to bolster efforts to jawbone the tearaway Australian dollar as the currency threatens to disrupt the nation’s fragile economic recovery, experts say.

THE Reserve Bank may have to bolster efforts to jawbone — or talk down — the tearaway Australian dollar, experts say, as the currency threatens to disrupt the nation’s fragile economic recovery.

The Aussie rocketed through US78c at the weekend to a two-year high of US78.36c after flat June-quarter inflation figures in the US turned traders away from the greenback.

It largely held ground today — fetching US78.1c late in the day — after Chinese quarterly economic growth figures surpassed expectations.

China’s gross domestic product growth climbed at an annualised rate of 6.9 per cent in the three months to June, ahead of its 6.5 per cent target.

Retail sales were up 11 per cent in year-on-year terms, while industrial output was 7.6 per cent higher.

Westpac head of currency Robert Rennie says pressure is mounting on the US Federal Reserve.

A higher Aussie, which erodes the competitive advantage of Australian exporters over their offshore rivals, puts the RBA in a bind.

With house prices starting to moderate, the RBA would be unwilling to risk another ­interest rate cut for fear of reigniting the east coast property boom, analysts say. Equally, it is unlikely to ­entertain interest rate hikes while inflation and wage growth ­remain muted.

Westpac chief currency strategist Robert Rennie said the RBA’s commentary on the dollar — starting with minutes due today from the July 4 monetary policy meeting — would be keenly watched for any subtle changes in tone.

RBA governor Philip Lowe has stuck by his mantra that an “appreciating exchange rate would complicate” the economic transition from the mining investment boom and steadfastly refused to adopt a more strident approach.

“It’s been a very well used and understood stance (but) at a range of about US78-79c, we’re getting to the levels that could complicate things,” Mr Rennie said. “I’d be watching very carefully the RBA’s policy statements for any shifts.”

RBA deputy governor Guy Debelle will speak at an economics forum in Adelaide on Friday while Dr Lowe will address the Anika Foundation lunch in Sydney next week — a fireside-style chat at which a host of issues are broached.

Michelle Bullock, the RBA’s assistant governor for the ­financial system, will also speak at a Melbourne economics conference on Friday.

The Australian dollar has held its ground after rocketing to a two-year high over the weekend. Picture: Ian Waldie/Bloomberg

Mr Rennie said various factors could keep the Aussie ­elevated in the short-term, with pressure mounting on the US Federal Reserve to keep America’s cash rate on hold amid mixed economic signals.

“The US dollar is very weak, (and Fed chair Janet) Yellen’s testimony last week seemed to suggest that if the Fed is to raise interest rates it will do so in a slow, methodical fashion,” he said. “Commodities have had a good run, and then there’s China.

“We had an expectation that Chinese GDP would see a relatively strong headline number but there was strong retail sales and industrial production figures as well.”

Westpac expects the Aussie to drift down to about US74c by year’s end, with a firmly on hold RBA likely to put a ceiling on the rampant currency.

IG Markets strategist Chris Weston said a dollar in excess of US80c “could start becoming problematic for the RBA”.

BetaShares Capital chief economist David Bassanese said the currency “could easily hit 80c” were the Fed to draw a line on further hikes this year.

Already, the pressures of a high currency are being felt across the Tasman. Reserve Bank of New Zealand deputy governor Geoff Bascand today said a lower NZ dollar would help rebalance growth towards tradeable industries.

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