Australian bankers frosted by Fed, want their own dollar lower


Dollar Rise Frustrates RBA Board

By Jacob Greber, Bianca Hartge-Hazelman, and Ben Potter
Australian Financial Review, Melbourne
Friday, September 20, 2013

Reserve Bank of Australia board ­member John Edwards has expressed frustration that the shock US Federal Reserve decision to continue injecting billions into the ­global financial markets sent the Australian dollar to a three-month high.

The decision not to wind back the quantitative easing sent tremors through financial markets around the world, increased the chances of more interest rate cuts by the RBA, and pushed the [Australian] dollar above US95 cents.

The higher dollar is likely to frustrate the new government and the Reserve Bank board, which wants a lower ­currency to make Australian manufacturers, tourism operators, and other companies more competitive with their foreign counterparts.

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"I want to see a lower dollar and it's going to take us longer to get there -- so it's not great," said Dr Edwards, who was an economics adviser to former prime minister Paul Keating.

Asked what level he would like to see for the dollar, he said: "I wouldn't put a number on it. Lower is good."

Fallout from the decision dominated Treasurer Joe Hockey's first international meeting in the job. At an APEC finance ministers' meeting in Bali he discussed the consequences for the ­global economy with counterparts from China, Indonesia, and Singapore, whose economies are vulnerable to a switch in capital to the US economy if rates there start to rise again.

The Federal Reserve's Open Market Committee's decision to refrain from slowing the pace of the $US85 billion-a-month bond purchases sent global sharemarkets, most major currencies, and gold surging. The S&P/ASX 200 ­rallied 1.1 per cent to a five-year high of 5295.5, the dollar surged to as much as $US95.22, taking this month's gains to more than 6 per cent. Gold jumped 5.6 per cent to $US1,370 an ounce.

The decision wrong-footed most financial market forecasters and re­inflamed debate about a global currency war, where countries manipulate their currencies lower to boost exports.

Westpac chief economist Bill Evans, one of a small minority of local analysts to anticipate the Fed move, predicted the RBA would be forced to cut the ­official interest rate to 2 per cent from its record low of 2.5 per cent, a move that could drive up house prices further and fuel fears of a property bubble.

Leading businessman Richard ­Goyder, chief executive of Wesfarmers, urged the central bank to hold its nerve and avoid further rate cuts.

"If I was the RBA I'd be advocating for a good open economy that allows us to adapt and not just rely on monetary policy," which can have unintended consequences, he said.

Dr Edwards downplayed concern about rising property prices, echoing RBA assistant governor ­Malcolm Edey, who said Australia was some way from a house price bubble. "While you might say that the house price issue is effected by the level of our rates, it's certainly not affected by the level of Fed rates, and what's going on there really is an issue of timing of the normalisation of US momentary ­policy," Dr Edwards said.

In a sign the decision has worried the Reserve Bank's policymakers, Dr Edwards said he was disappointed the dollar was back up and "it would have been better to have [the taper] sooner."

"I would have thought the main thing to be concerned about, overwhelmingly, is that the FOMC, in its wisdom, has come to the view the US economy as too weak to begin to taper. That's quite concerning," he said.

"At the same time the consensus of FOMC members is that growth is now, through 2013-14, weaker than they expected."

Dr Edwards said the Fed was likely to slow bond purchases before the end of the year.

"Whether they taper this month, at the October meeting, or the December meeting is more of a detail,” he said.

“The response to this decision, which seems to be universal indignation in markets, will likely prompt them to move faster than not."

A spokesman for Mr Hockey said the US move had been a "source of significant conversation" among APEC finance ministers meeting in Bali.

Mr Hockey, accompanied by ­Treasury secretary Martin Parkinson, held talks with the Indonesian minister of finance, Chatib Basri.

They issued a statement that said: "While there are some positive ­economic signs coming from Japan and the US, we still face difficult and potentially volatile economic conditions globally."

Another Australian expert to predict that the Fed wouldn't taper, Colonial First State Global Asset Management's head of rates, Annette Mullen, said she doubts the Reserve Bank will cut rates because the dollar has crept higher.

"Why would you be the Reserve Bank of Australia fighting the Fed?" she said.

Ms Mullen believes the Reserve Bank faces a challenging task balancing the prospect of lower borrowing costs, which could spur economic activity but send the wrong message to property investors. "If you think that housing investment in Australia has improved in recent weeks, you probably don't want to facilitate that," she said.

Westpac foreign exchange strategist Richard Franulovich predicted that the ­dollar would climb back towards parity with the US dollar.

"Look for currencies like the Aussie, Kiwi, and some key emerging market currencies to trade on the front foot against the US dollar and they could see gains in the order of several percentage points over the coming weeks," he said.

Another bullish currency forecaster, UBS, maintains the dollar could reach around US98 cents by year's end.

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