Why a forex foray could burn the Reserve

Appreciation of the dollar has resulted in unrealised valuation losses on the Reserve Bank's forex reserves, highlighting the risk of using currency trades to spark a devaluation.

With the Australian dollar trade-weighted index recently around 28-year highs, there have been calls for official intervention to weaken the exchange rate. But suggestions the Reserve Bank might need an injection of capital due to potential losses on its foreign exchange reserves highlights the risk to taxpayers from intervention in foreign exchange markets. The appropriate instrument for addressing concerns about a high Australian dollar is the official cash rate.

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