Soaring Australian dollar has the Reserve Bank on high alert

03_Soaring Australian dollar has the Reserve Bank on high alert

By Lucy Hughes Jones
(Australian Associated Press)

The soaring Australian dollar has the Reserve Bank on high alert, with the governor ramping up his rhetoric about its recent rise.

The RBA left the cash rate at the record low of 2 per cent, but governor Glenn Stevens warned the surging currency could threaten the non-mining economy’s recovery.

“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” he said in a statement after the RBA’s April board meeting on Tuesday.

Since the last meeting, the Aussie has spiked more than 6 per cent against the greenback, and it powered above the US77c level last week.

The RBA has renewed attempts to jawbone the currency lower recently, as central banks often favour a lower exchange rate to stimulate inflation and boost economic activity.

And the central bank has been counting on a weaker currency to drive the economy’s transition away from mining.

CommSec chief economist Craig James said the RBA attributed the Aussie’s strength to higher commodity prices and the US Federal Reserve’s move to pare back rate hike forecasts.

“But no doubt the Reserve Bank believes that this is a temporary phenomenon,” he said.

The cash rate has been sitting at 2 per cent since last May, and CommSec doesn’t expect exchange rate worries to trigger any cuts in the foreseeable future.

But AMP Capital Investors chief economist Shane Oliver said the Aussie’s gains threaten trade-exposed sectors like tourism, higher education and manufacturing.

These industries have been helping to fill the growth gap left by a slowing housing sector, he said.

“Soft jobs data next week, soft March quarter inflation data later this month and continued strength in the Australian dollar could set the scene for a May rate cut, which is our base case,” Dr Oliver said.

The RBA was upbeat about prospects for the domestic economy but warned tepid inflation provides scope for a future cut.

“New information should allow the board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing,” Mr Stevens added.

JP Morgan interest rate strategist Sally Auld said the RBA has tweaked its language around jobs improvement, suggesting the bank suspects this may now be in the past.

But the bank noted that global markets had stabilised after a period of volatility, removing another risk to the local economy, CommSec’s Mr James said.

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