Aussie Dollar Takes Another Pounding

The Aussie dollar took another pounding in line with investors reassessing the US interest rate move and the inevitability, according to some, of further rate rises in the US of 0.5%. As it is unlikely that the Australian economy needs this level of monetary policy tightening, the differential between US and Australian rates is likely to widen, putting further downward pressure on the Aussie dollar.

This will undoubtedly cause screaming headlines, questions in Parliament and concern about the future of the Little Aussie Battler.

However, news is not all bad and certainly farmers and exporters will welcome the increased competitiveness of their products that comes with a decrease in the local currency. On the down side, imports will become more expensive and this is where the Reserve’s concern comes in: whilst more expensive imports will make locally produced products more competitive by comparison, the inflationary effect will flow through into the economy at a time when tax cuts, the GST, increasing wage pressures and the Olympics are all coming to bare.

We expect that there is little the Reserve can do to stem the tide in the Australian dollar's decline, except continue to manage monetary policy with an eye on the total economy, and leave it to the markets to determine the correct level for the dollar.