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RBA’s Stevens warns the Aussie will fall

H.S. Borji
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RBA’s Stevens warns the Aussie will fall

Reserve Bank of Australia Governor Glenn Stevens warns that the Australian dollar is at risk of weakening further against its US counterpart, despite continued demand for the currency.

In a testimony to a parliamentary committee on Wednesday, Stevens noted that the markets have “underappreciated” the risk of a weaker Australian currency, and that he would be surprised if it maintained its high levels. In Stevens’ view, weak economic fundamentals will probably contribute to a sharp pullback for the Australian dollar, which has remained remarkably resilient in the face of a declining resource sector, rising unemployment and an austere budget.

The central bank has voiced its concerns about a higher local currency on several occasions, claiming it to be a drag on the recovery efforts. In the RBA’s view, the Aussie should be trading below 90 US cents. A weaker currency, it is hoped, could bolster Australia’s competitiveness in the global market.

The Australian dollar initially weakened following the remarks, but eventually consolidated north of 93 US cents.

The US dollar advanced to an 11-month high against a basket of currencies on Tuesday, as stronger than forecast housing data and declining risk aversion internationally boosted demand for the greenback.

So far this year, the Australian dollar has advanced 4.5 percent against its US counterpart.

In contrast, the US dollar index has advanced 2.2 percent over the same period, suggesting the greenback has underperformed against the Aussie.

Stevens also commented on monetary policy on Wednesday.

Speaking about the RBA’s present course of action, Stevens said the central bank is “allowing time for measures already taken to have their effects, and of the very considerable limitations for monetary policy in fine-tuning economic outcomes over short periods.”

“It has also seen some value, in the present circumstances, in maintaining a sense of steadiness and stability,” Stevens added.

Earlier this month the RBA voted to keep interest rates at a record low of 2.5 percent for the twelfth consecutive month. The minutes of those meetings, which were released earlier this week, suggested interest rates would remain low for a while longer in order to promote stability and boost economic growth.

The Australian economy expanded at an annualized rate of 3.5 percent in the first quarter. Overall growth in the second quarter is expected to be somewhat softer, the minutes revealed on Tuesday.

“Output growth would probably be somewhat softer in the near term after recent higher readings, but was expected gradually to strengthen again over the forecast period,” the minutes stated.

In economic data, the Melbourne Institute reported a decline in the Westpac Leading Index. The gauge of Australian economic activity declined 0.1 percent in July, following a gain of 0.1 percent the previous month. July marked the sixth consecutive month the index’s growth rate has been below trend. This suggests growth in the second half of the year will also remain below trend.

The RBA cut its growth forecast in its latest quarterly Statement on Monetary Policy. Central bankers revised their 2014 growth outlook from 2.75 percent to 2.5 percent. Growth is expected to be between 2 percent and 3 percent next year, down from the previous estimate of 2.25 percent to 3.25 percent.

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