The Australian dollar has remained weak ahead of a much-anticipated US Federal Reserve meeting, which could see a wind-back of the stimulus program that has supported the currency.
Caution in foreign exchange markets came as Reserve Bank governor Glenn Stevens continued to talk down the currency, saying an Australian dollar trading above US90¢ would not be sustainable for the economy over time.
The currency fell to a four-month low of US88.83¢ early Wednesday morning, amid nervousness over a possible start to tapering on Thursday morning.
Investors broadly shrugged off Mr Stevens’ comments. The Australian dollar rose slightly just before the start of his remarks to the House of Representatives’ economics committee in Canberra, lifting from about US89.15¢ to US89.26¢.
It fell back in the afternoon, and was buying US89.04¢ in late trade.
Mr Stevens reiterated his preference for a lower dollar and said the exchange rate remained “uncomfortably high”, even though it has declined by about 13 per cent since the last economics committee hearing in February, when it was trading about US103¢.
He added that intervening in foreign exchange markets remained an option for the RBA, although the central bank had not done anything “unusual” in recent times.
“I think the governor accepts the need for further stimulus in the Australian economy but he is focused on providing that stimulus through a weaker Australian dollar rather than lower rates, and I think that came out [on Wednesday],” Westpac’s chief currency strategist Robert Rennie said.
Mr Rennie said he did not expect the local currency to strengthen even if the Fed did not start the reduction of its monthly asset purchases on Thursday.
“If we get nothing from the Fed, I’m not sure that it will manifest in a strong performance in the Australian dollar,” he said.
“Let’s face it. We had a disappointing MYEFO [yesterday’s Mid-Year Economic and Fiscal Outlook]. We generally had a disappointing run of economic data and corporate news [from] Holden and Qantas. It’s had to see where that good news is going to come from.”
Mr Stevens said in response to questions about the US’s quantitative easing policies that he welcomed the start of tapering and a normalisation in the country’s monetary policies, although the stimulus withdrawal would have “some disruptive effects” on other countries.
The governor’s remarks came as Pimco, the manager of the world’s largest bond fund, said the strong Australian dollar was in part responsible for the lack of real growth in business investment outside the mining sector this year.
‘‘Due to elevated cost structures and a high exchange rate, Australia Inc is increasingly unable to compete in a fiercely competitive global market,’’ Pimco analysts Adam Bowe and Robert Mead said in their report.
“The RBA will most likely have to keep interest rates low for an extended period to ease the transition away from mining-assisted growth and encourage a weaker exchange rate.’’
They added that movements in the exchange rate took some time to feed through to the real economy, and as such would continue to remain cautious about an improvement in growth next year.
“Historically, it has taken two years or so for the transition mechanism between the exchange rate and the real economy to work, meaning the full impact of this year’s currency depreciation is unlikely to be felt before 2015,” the analysts wrote.
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