Dollar dips on intervention talk by Stevens

The Australian dollar has fallen to a 2-month low after Reserve Bank governor Glenn Stevens ramped up his comments about the need for a lower currency, saying he was "open-minded" about intervening in the foreign exchange markets.

The dollar was trading just below US93¢ before slipping to US91.99¢ early on Friday. It eased further and was buying US91.79¢ late in the session. The currency has shed about 2 per cent of its value this week.

"Just speaking about the possibility of intervention was enough to see the Australian dollar sell-off," HSBC economists Paul Bloxham and Adam Richardson said.

"While the RBA would clearly have welcomed this move, time will tell whether this weakness persists."

Mr Stevens' comments, made as part of a speech at the Australian Business Economists annual dinner on Thursday, continued the Reserve Bank's recent strategy of talking down the dollar. The central bank believes a lower exchange rate will support export industries as the economy moves away from mining-led growth.

The dollar fell to a low this year of just under US90¢ in late August, but has since regained some of its value and rose above US97¢ last month - a level that many regard as starting to crimp parts of the economy.

The remarks on intervention, which Mr Stevens spent some time elaborating on in his speech, also highlighted challenges faced by central banks around the world after the financial crisis.

"It's a hot topic," Westpac senior currency strategist Sean Callow said. "It all really gets back to the incredible generous monetary policy settings in the US, Japan, UK and, to a lesser extent, Europe of super-low interest rates and quantitative easing.

"You are far more vulnerable to a very pumped up exchange rate if your economy is still growing enough for you to have positive real interest rates, and then you will attract capital. So that's not something that's going to change if the RBA decides to get into the market."

Analysts said that while Mr Stevens was keeping the door open for intervention, such action appeared unlikely given that the RBA's own modelling appeared to indicate the dollar was not far from its fair value. "We suspect that this statement was a further attempt to exert downward pressure on the Australian dollar rather than the governor signalling that intervention is imminent or indeed probable," Commonwealth Bank economist Gareth Aird said.

Mr Stevens also continued to show a preference for a weaker dollar to stimulate the economy, rather than lowering interest rates further.

But Westpac chief economist Bill Evans argued that the central bank's present approach - to talk down the dollar and raise the possibility of intervention - was risky and also "less attractive especially when, by global standards, we have ample flexibility around interest rates".

"In such a deep and liquid market the [RBA] would now need to allocate a much larger arsenal than in past interventions to a successful intervention," Mr Evans said, pointing out that Mr Stevens did not raise the cost of a failed intervention. "Failure and the resulting mark to market loss on the newly acquired foreign exchange might prove extremely costly and potentially damaging to the government's budget position - hardly a very attractive option for a central bank governor when the 'proof' of overvaluation of the currency is so difficult."

Switzerland's central bank, which had tried to bring down the value of the Swiss franc by buying foreign assets following the financial crisis, saw its foreign currency reserves rise to more than 70 per cent of gross domestic product last year.

Mr Stevens said last year that in contrast, Australia's reserves were only a small fraction of GDP.