The high price of our dangerous dollar

ANZ chief executive Mike Smith has picked up the same Australian dollar danger signals that I am hearing (The looming battle for currency advantage, 25 October). But Smith has gone one step further and effectively issued a warning to the Reserve Bank Governor, Glenn Stevens that the Reserve bank is in danger of making a bad mistake.

I want to emphasise that I am taking ‘commentators licence' and not using Mike Smith's words. I urge everyone to go watch the KGB interview above and view exactly what the ANZ chief said (the remarks about the dollar are towards the close).

The Smith message to Stevens, (again using ‘commentators licence'), is that interest rate reductions no longer have any major effect on dwelling demand, because rates are already at historically low levels. So Glenn Stevens, stop worrying about a housing bubble. The real issue is the level of the Australian dollar. If the dollar starts to jump interest rates must come down rapidly.

According to Smith, the Reserve Bank criteria for interest rate decisions should be dominated by the dollar. I pointed out yesterday that the currency wars and the money printing taking place in Europe and the US could send the Australian dollar much higher. Smith says that the huge liquidity in the system is going to start speculation on commodities and with the consequent higher prices will come an Australian dollar that goes even higher.

Interest rates become the only weapon the Reserve Bank has to prevent the further damage that is in store for our employment creating industries like tourism, education and manufacturing.

Mike Smith adds that central bankers are far wiser than he on these matters. I think Smith is absolutely right about everything except that last point. Smith is mixing in global markets every day and he is hearing concern around the regions about the repercussions of the US and European money printing and the currency war.

Our central bankers lead a more isolated existence. Right around Australia, among the leading economists and commentators, there was focus on the high inflation caused by the Gillard government's energy policies. Those views may or may not have been influenced by the Reserve Bank but they missed the key point. The one issue that now counts is the dollar.

Share market investors need to understand just how dangerous the global currency wars are to Australia. In the short term they may push up the price of copper and gold but iron ore and coal are the same magnets for hot money.

But if our dollar rises substantially -- as is likely -- a great many enterprises will be hit. And remember they have already been weakened. Unemployment will go higher and bank bad debts will increase.

Everyone, including the Reserve bank, should take the Smith warning delivered via the KGB very seriously.

Many thanks to the wonderful conversation items contributed yesterday by readers to (The looming battle for currency advantage, 25 October). They provided a rich tapestry of views on what is a vital matter for the world and Australia.