Why the dollar is defying the Reserve Bank


Look who’s taking on the Reserve Bank again over the dollar. Or rather who’s not because by the looks of it the whole world is.

While an exchange rate is shorthand for a nation’s economic fortunes, oddly enough economists find it impossible to predict. Well, they have no problem predicting it, but getting it right has proved quite the challenge. Maybe it’s because there are two sides to every exchange rate.

Anyway few are saying the dollar should rise, yet that’s what it’s been doing for months.

For a long while it was tracking the euro almost uncannily, even though the two currencies have absolutely nothing in common except for the fact that they’re not the US dollar.

Then it went through a phase of following Wall Street up and down.

Maybe it’s doing both since the euro has been rising against the US dollar while Wall Street has been going gangbusters.

Indeed there’s a connection between the two because very low rates mean money manipulators are happy to take a bigger punt on riskier opportunities, including us, especially when financial markets have never been calmer.

Still, that’s not stopping the Reserve fretting about commodity prices falling. If the dollar knew what it was doing it would be following them down quick smart.

Never mind export volumes are booming, economic growth has unexpectedly climbed up a notch and our interest rates are a beacon in a yield-deprived world.

Even CommSec’s index comparing international prices of iPads, based on the economic theory they should be the same after adjusting for exchange rates, puts the fair value of the dollar at US94¢.

Yet the Reserve is warning that “we think investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point”. It also said it was overvalued “and not just a few cents”, having previously hinted that somewhere in the mid eighties would do nicely thank you.

In truth the market has it by the short and curlies and is able to call its bluff with impunity because the only way the Reserve can bring the dollar down is by cutting rates and it can’t do that without firing up the property market and letting inflation loose.

Even that might not work. Don’t tell anyone but the dollar has actually increased since the Reserve’s last rate cut.

And don’t forget it’s on record, repeated only a few days ago, that it wants rates to stay where they are for “some time”. That rules out a cut as much as a rise.

Or it could always intervene in the foreign exchange market by selling dollars but then that would be at the risk of sullying its reputation for keeping its mitts off the markets.

Even some of its central bank relations are taking advantage of it. Most of the recent buyers of Australian government bonds are them and sovereign wealth funds.

Mind you, the Reserve will probably be proved right eventually.
Still, that would require the US dollar rising and it’s proving even more reluctant to do as it’s told.

Read more: http://www.theage.com.au/money/investing/why-the-dollar-is-defying-the-reserve-bank-20140711-zt3pt.html#ixzz37Obz9rqc