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Weak dollar eases pressure to cut rates

A weaker Australian dollar has decreased pressure on the Reserve Bank to ease monetary policy in the near term, with the central bank expected to keep the cash rate on hold at its board meeting on Tuesday.
By · 2 Jul 2013
By ·
2 Jul 2013
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A weaker Australian dollar has decreased pressure on the Reserve Bank to ease monetary policy in the near term, with the central bank expected to keep the cash rate on hold at its board meeting on Tuesday.

The currency lifted slightly on Monday, following better than expected house prices and manufacturing data, after falling to a 34-month-low of US91.1¢ on Monday morning.

The dollar has lost more than 10 per cent of its value since the Reserve Bank last eased rates in May. It was trading at US91.99¢ late on Monday.

"The Reserve Bank can afford to hold steady, and it all comes back to the exchange rate," Barclays chief economist Kieran Davies said.

"They've wanted to see a lower dollar for quite a time now, and it's finally going their way. It's fallen a lot in a short space of time."

The Australian Performance of Manufacturing Index rose 5.8 points in June to 49.6, just below the 50-mark, which signals an expansion in activity. But exports continued to struggle despite the falling dollar, the monthly survey found.

The housing market strengthened in June, with dwelling values rising 1.9 per cent across eight cities, the RP Data-Rismark Index found. Capital city home values lifted by 3.8 per cent during the 2012-13 financial year after a 3.6 per cent fall the previous year.

Inflation remain unchanged last month but rose 2.4 per cent in the 12 months to June, the TD Securities-Melbourne Institute gauge released on Monday found. It left the door open for further rate cuts by the Reserve Bank if they were needed to stimulate the economy.

The latest figures came as Moody's reaffirmed Australia's AAA foreign and local currency ratings, citing the country's "very high economic resiliency, very high government financial strength, and very low susceptibility to event risk".

The positive economic data was overshadowed by concerns about Chinese manufacturing on the Australian sharemarket.

While markets had expected the slowdown in Chinese PMI for June, the recent credit crunch in the interbank market was not captured in the data, suggesting further readings could be weaker.

The benchmark S&P/ASX 200 Index closed sharply lower on Monday, falling 1.9 per cent to close at 4710.2 points. The broader All Ordinaries Index slipped 1.8 per cent to 4689.7 points.

The Reserve Bank's index of commodity prices for June, released late on Monday, also reflected the recent falls in the prices of iron ore, gold, coal, rural commodities and base metals.

Economists said further rate cuts later this year still could be on the cards amid a slower than expected transition towards non-mining-led growth.
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