RBA warning as Australian dollar drops below US76c

THE RBA continues to warn that the Aussie dollar remains over valued despite the currency dropping today to its lowest levels since the GFC.

THE RBA continues to warn that the Aussie dollar remains over valued despite the currency dropping this afternoon to its lowest levels since the global financial crisis.

At 3:30pm (AEDT) the Australian dollar was changing hands at US75.92c, down from US76.51c late yesterday. It traded as low as US75.88c before retracing some ground to US76c at 3.45pm.

The head of the RBA’s economic forecasting department, Chris Kent, told a conference in Hobart the Aussie dollar needed to continue falling to help support exports in the face of slow growth, rising unemployment and tumbling commodity prices.

Mr. Kent said a 20 per cent fall in the Australian dollar since mid-2013 had been helpful in terms of bracing the economy, but more is needed, especially as iron ore prices continue to plumb multi-year lows.

“While the depreciation seen to date will be helpful, our assessment is that our exchange rate remains relatively high given the state of our overall economy,” said Mr Kent, who helps shape monthly interest rate decisions at the RBA.

The Aussie dollar fell below US76c for the first time since May 2009, extending its losses for the year so far to around 8 per cent against the US dollar. Traders said upwards momentum in the US dollar, as the US Federal Reserve nears the point of raising interest rates, was weighing heavily on the Aussie.

In a frank assessment of the outlook for the economy, Mr Kent said he was unsure where new sources of growth would emerge in the future.

“There are many uncertainties and better growth is not guaranteed. It is also difficult to know exactly where growth will occur,” Mr Kent said. “It is not that economic growth has weakened of late. But there is little to suggest that it will increase in the near term,” he said.

Already approaching its highest levels in 13 years, unemployment will continue to nudge up, Mr Kent added. “The unemployment rate will rise for a bit longer and peak a bit higher than previously expected.”

Mr Kent’s warning follows comments last week by RBA board member John Edwards that unemployment was certain to rise as the economy grows at a rate well below that needed to employ all the new entrants into the job markets.

Mr Edwards said the economy had to achieve growth of 3 per cent, well above the economy’s current annual growth rate of 2.5 per cent seen in the fourth quarter of last year.

Major banks continue to downgrade their forecast for iron prices in the years ahead as supply swamps global markets and demand from countries such as China slows, adding to the caution. UBS this week said it thinks a growing market surplus of iron ore will be greater than expected due to weaker than anticipated steel production.

UBS this week cut its 2015 projection for iron ore 11 per cent to $US59 a tonne and its 2016 projection 10 per cent to $US58 a tonne.