RBA has lost fight for lower Australian dollar

RBA has lost fight for lower Australian dollar

The Reserve Bank of Australia has lost its campaign to subdue the stubbornly strong dollar due to ultra-low interest rates in major world economies, and Australia's comparatively strong economy according to a senior economist at Perpetual.

The local unit has spent the past two months testing US94¢ after trading below US87¢ a mere five months ago.

"The RBA's war against the Australian dollar — and its desire to get it lower — has been lost," said Matt Sherwood, senior economist at Perpetual.

Beyond cutting rates, no amount of rhetoric from the RBA has halted the Australian dollar's ascent, climbing on the back of loose monetary policies determined in Washington and Brussels, said Mr Sherwood.

"Indeed, over the past 18 months the bank has been telling us that the Australian dollar is historically high and is at levels that are tightening financial conditions."

On the flip side, the high local currency has allowed the Reserve Bank to keep interest rates low by putting a lid on inflation, he said.


Households cheer

Economists are concerned the high Aussie dollar is hurting Australia's biggest source of export dollars, commodities.

Manufacturers, tourism operators, education providers and retailers are also grappling with the strong currency.

But beyond the export industries, many households would be cheering the strength of the local currency.

That strength has meant inflation pressures are subdued, which has contributed to the ability of the central bank to keep interest rates at historic lows.

That in turn has relieved the financial pressure on mortgage holders by anchoring their monthly repayments.

Importers are paying less for goods, which has translated into lower sticker prices in stores and heavy discounting, with retailers passing on lower costs directly to consumers.

Clothing prices dropped 2.1 per cent over the March quarter, according to Australian Bureau of Statistics data, while the category of furnishings and furniture was 1.5 per cent lower.

International and domestic travel and accommodation fell 2.4 per cent over the quarter.

Import savings however have not been passed onto motorists, with petrol up 4.1 per cent.

Meanwhile, Australians' ardour for online shopping may be rekindled if the local currency does what a number of currency experts are predicting and revisits parity with the greenback in the coming months - tough on local retailers, but another boost to households' spending power.Battle lost not war

But Shane Oliver, senior economist at AMP Capital, disagrees the RBA has lost its ability to push the Aussie dollar down.

"They've lost the battle, but they haven't lost the war," Mr Oliver said.

Mr Oliver believes the RBA has deliberately weakened its rhetoric surrounding the dollar since January when the dollar fell to US0.86¢. This was coupled with the higher than expected inflation numbers in the December 2013 quarter of 2.7 per cent.

But it's since rebounded to US0.94¢.

"If the Aussie dollar doesn't start heading down again they are going to have to adjust their rhetoric and become more aggressive in their jawboning," said Dr Oliver.

Eryk Bagshaw

Eryk Bagshaw is an economics reporter for the Sydney Morning Herald and The Age, based in Parliament House

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