Further cuts in interest rates likely despite dollar's retreat

Ford's pullout from Australian production after nine decades together with slowing Chinese economic growth reinforced bets Australia's central bank will add to interest rate cuts even after the local currency plunged.

Ford's pullout from Australian production after nine decades together with slowing Chinese economic growth reinforced bets Australia's central bank will add to interest rate cuts even after the local currency plunged.

Interest rate markets show a 56 per cent chance the Reserve Bank of Australia will cut by September after lowering its benchmark to a record 2.75 per cent this month.

The Australian dollar remains the world's most overvalued currency even after dropping 10 per cent against the US dollar this month.

Slowing growth in China, Australia's biggest export market, is spurring concern the RBA's 2 percentage points' worth of rate cuts in 19 months won't be enough to offset the drag from a currency that is still trading well above its 30-year average.

The Australian dollar's retreat came too late to save Ford Australia, which said its costs are double those in Europe and four times those in Asia.

"The fall in the Australian dollar will be warmly welcomed by the Reserve Bank since a lower currency is an effective policy easing," chief economist at Westpac Bill Evans said. He predicts policymakers will cut as early as next week and eventually lower the benchmark to 2 per cent.

The Australian dollar bought US96.45¢ late in the Sydney session after touching US95.94¢ last week. The currency was 29 per cent above purchasing power parity, based on differences in consumer price changes, according to Bloomberg figures.

China's manufacturing is easing as its economy decelerates, weakening commodity prices that have underpinned a decade-long expansion in Australia's resources industries. China's President Xi Jinping has signalled a tolerance for slower expansion to avoid environmental degradation.

China's economy slowed to 7.7 per cent growth in the first quarter, while remaining above the government's full-year target of 7.5 per cent. The economy expanded 7.8 per cent in 2012, the slowest in 13 years.

China's output may slow to a 6 per cent pace for at least a couple of quarters in coming years, according to Robert Mead, of Pacific Investment Management. And the RBA's willingness to add to rate cuts will wane as the Aussie's decline provides relief to the domestic economy, according to Citigroup.

"Our view of a lower Australian dollar for longer will help with the move to export and domestic-led growth once the mining boom peaks," said Paul Brennan, a senior economist at Citigroup in Sydney. "It also portends the risk of an increase in tradeables inflation, furthering our view that the RBA is done with the current easing cycle."

The Aussie may fall to US95¢ or lower amid prospects the Federal Reserve will move to slow stimulus measures, Mr Brennan said in a note to clients.

Federal Reserve chairman Ben Bernanke said this month the US central bank may cut the pace of asset purchases if there are indications of sustained growth, spurring a rally in the greenback.

Goldman Sachs said last week it remained bearish on the Aussie, expecting it to fall to US90¢ in 12 months.

Australia's mining boom is probably at its peak after companies scrapped or put off $150 billion of resources and energy projects in the past year, the government said this month.

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