A SURGE in foreign deposits with the Reserve Bank has sparked claims it may be acting to take the heat out of the Australian dollar by stockpiling foreign currency on its balance sheet.
Central bank purchases of Australian dollars are seen as one reason for its strength, with up to 23 of the official institutions from around the globe including the currency in their portfolios.
In research published on Wednesday, UBS strategist Gareth Berry said there was "compelling" evidence to suggest the RBA had taken the unusual step of meeting central bank demand in a way that stopped the central banks from pushing up the currency on foreign exchange markets.
In the three months to October, foreign central banks' deposits with the RBA have jumped by $848 million to more than $2 billion, the highest since early 2009.
At the same time, the RBA has lifted its foreign exchange reserves by almost exactly the same amount.
Mr Berry said these trends suggested the central bank was taking the heat off the currency by supplying currency directly to foreign central banks, which were then keeping the assets on deposit at the RBA.
This would satisfy foreign central banks' demand for Australian dollars without forcing them to buy currency on the open foreign exchange market, where the dollar's value is set.
''It is as though freshly minted Australian dollars are being sold directly to foreign central banks and the proceeds added to the RBA's pool of FX reserves,'' Mr Berry said. ''If this is a genuine policy innovation, then it takes the RBA into uncharted territory.''
While the RBA does not comment on market intervention issues such as this, it has tried to talk down the dollar in recent months.
On Tuesday it said the dollar was ''higher than might have been expected, given the observed decline in export prices and the weaker global outlook".
But any impact from this rhetoric was outweighed by its decision to keep interest rates unchanged at 3.25 per cent, which pushed the dollar to a near six-week high.
The dollar continued to rise on Wednesday, closing at US104.63¢
While direct intervention in the currency market would probably have a bigger impact, analysts say the latest tactic would take some of the strength out of the dollar.
The chief economist at HSBC, and former RBA staffer, Paul Bloxham, also said there was a form of intervention occurring in the market, which was probably putting some downward pressure on the currency.
''I think we're going to see more of this kind of reaction from the Reserve,'' Mr Bloxham said.
The wide-ranging interest in the dollar was revealed in internal RBA documents published earlier this year that showed central banks from countries such as Germany, Switzerland, Hong Kong, Russia, and Kazakhstan all held the currency.