The RBA must act on the dollar

The Aussie dollar is so popular it can no longer protect the economy from an offshore downturn, without intercession from the Reserve Bank. So what to do, exactly?

The Reserve Bank has no choice but to join the currency debasement contest that’s now going on around the world, and to cut rates by another 1 per cent in the coming 12 months – including 0.5 per cent by the end of the year.

The Australian dollar is in a 'no lose' situation: when western central banks launch asset buying programs, as the central banks of the US, Europe, UK and Japan have all done lately, the 'risk on' environment sees the Aussie rise as a result of fund buying; but Australia’s AAA status and relatively high yield makes it a preferred safe haven as well, especially for other central banks.

Last week the RBA published a list of 16 global central banks that have been buying Australian dollars as part of their diversification strategy, including Russia, Brazil, Korea and Switzerland. On Thursday the Philippines was added to the list.

The result is that as the Chinese economy slows, commodity prices fall and with them Australia’s terms of trade, while the exchange rate has remained stubbornly above 104 US cents.

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