The Reserve Bank has admitted it was helpless in the face of the US government default crisis because it could not predict or properly prepare for how the drama would play out.
While the US Congress this week approved a late deal to increase the US borrowing authority for a few months and end a partial government shutdown, Reserve Bank governor Glenn Stevens said failure to secure a resolution could have gone "very badly".
His comments came as fallout from the debt impasse and signs of renewed strength in the Chinese economy pushed the Australian dollar to a four-month high, touching as much as US96.47¢ in the Friday session. The rise coincided with Australia's sharemarket closing at its highest level since mid-2008. The benchmark S&P/ASX 200 Index closed up 38.4 points, or 0.7 per cent, at 5321.5.
Even so, the rise in the dollar has created a fresh headache for the Reserve Bank, which is under pressure to ease interest rates again, but is mindful of not stoking a resurgent property market.
Mr Stevens said in Sydney on Friday a lower currency would be helpful to the growth drivers of the economy.
"I'd prefer it to be lower than this rather than higher," Mr Stevens said.
One of the most senior central bankers to speak out about the US debt ceiling standoff, Mr Stevens said there would have been a "very big fiscal contraction in the United States" if the deadline to raise the debt limit had been missed this week.
If that had happened, the US would have had to cut government spending by 4 or 5 per cent of gross domestic product because it wouldn't have been able to fund the expenditure.
"How would that have played out through the system?" Mr Stevens asked.
"Most of us will have worked out a few contingencies, but the truth is we really don't have much of an idea how that would have gone."
He said it was not difficult to contemplate ways in which it could have gone "very badly", but "at least for some months now we don't face that particular spectre".
Meanwhile, the partial government shutdown will probably have some dampening effect on US demand in coming months.
"But my guess would be ... that that won't linger once everybody's back to work, and I understand that in many instances they will be back-paid, so I don't think there should be a big impact on demand in the US," Mr Stevens said.
"A much bigger thing would have been had there actually been a default event."
Mr Stevens' comments came as Treasurer Joe Hockey expressed doubts the world has seen the last of the US debt impasse and suggested a renewed focus on opening more markets in Asia as a response to ongoing instability.
Mr Hockey told Fairfax Media the government was prepared for more volatility in financial markets despite US Congress on Thursday finally passing legislation allowing the US debt ceiling to be raised, thereby averting a default on US debt that could have sent the global financial system into a tailspin.
"This is a matter that's going to take a long time to resolve," Mr Hockey said. "Essentially, they are just kicking the can further down the road."
Westpac chief economist Bill Evans said the US political wrangling and tapering delay would be supportive of an RBA rate cut.
"At present markets are giving less than a 30 per cent chance of another rate cut from the RBA, with rates confidently priced to be rising from September next year," Mr Evans said.
"We expect that to change quite significantly over the course of the rest of this year."
Mr Evans expects the central bank will ease rates twice more before it reaches the end of its current easing cycle.