Jason Cadden Perth Now October 30, 2012
THE Reserve Bank of Australia (RBA) says the conditions are not right for it to intervene in currency markets to reduce the value of the Australian dollar.
Reserve Bank of Australia (RBA) deputy governor Philip Lowe told the Commonwealth Bank's Australasian Fixed Income Conference in Sydney the Australian dollar is not overvalued.
"The major influence on the currency is the terms of trade, the commodity prices," Dr Lowe said.
"That's why the exchange rate is high."
Dr Lowe said in answer to questions at the conference that the current conditions were not right for an intervention.
"While it's a bit surprising that the currency hasn't come down - the outlook for the world economy has softened and interest rates have gone down - the currency is still not at a point where I think you can make a strong conclusion that it is fundamentally overvalued," he said.
"Really you're talking about whether the Reserve Bank should undertake a very large scale intervention in the currency markets.
"The argument for doing that would arise if we thought the currency was fundamentally overvalued and was having a really adverse affect on the Australian economy."
A recent case when the RBA intervened in currency markets was in late October 2008, when it spent $3.15 billion propping up the Australian dollar after it fell below 61 US cents as the worst of the global financial crisis was setting in.
"Historically, we've been prepared to intervene for short periods of time when there is market dislocation or where the exchange rate has been fundamentally away from where it should be," Dr Lowe said.
"So that possibility is not ruled out but it would be a very big step moving away from a system that has serve us very well for a very long period of time."
Dr Lowe said the floating of the Australian dollar in December 1983 was one of the most fundamental economic reforms Australia has made over the past 30 years.
"It has been an incredibly stabilising influence, there have been periods where people may feel very uncomfortable about the movement but if you look back over the history it is difficult to escape the conclusion that a floating exchange rate has been a tremendous benefit to this country," he said.
"A decision to to intervene by the Reserve Bank would be a very big one."