RBA Board Member Worries Fed Easing Will Strengthen Aussie Dollar

(Bloomberg) --

Reserve Bank of Australia board member Ian Harper said his nation’s economy does “not need” a stronger currency -- but worries that’s exactly what it could end up with if the U.S. Federal Reserve keeps easing.

“The exchange rate is doing what we hoped it would do, it’s staying calm, because there are upward pressures here,” Harper told a finance conference in Melbourne on Thursday. “The Chinese are stimulating the Chinese economy, that stimulates commodity prices. Other things equal, that strengthens the Australian dollar.”

But with economic growth at just 1.4% and unemployment above the natural rate, “you do not need the exchange rate to appreciate, thank you very much,” he said.

Fed officials reduced U.S. rates Wednesday by a quarter-percentage point for the third time this year, while signaling a pause in further cuts unless the economic outlook changes materially. As a result, traders pared bets on a fourth consecutive cut in December.

Strong Aussie

Despite this, the Aussie dollar jumped to a three-month high of 69.30 U.S. cents Thursday. It’s poised for the biggest monthly gain since a rally in January, which came after the Fed signaled it was done raising rates.

The target range for the Fed’s benchmark is 1.5%-1.75%. RBA Governor Philip Lowe and his board have cut three times since June, taking Australia’s cash rate down to 0.75%.

Harper noted there’s an interest-rate differential with the Fed in favor of the U.S., which helps to offset the impact on the Aussie dollar of China’s stimulus and higher commodity prices.

“What happens if the U.S. continues to cut rates?” Harper asked. “Well well well, the differential in favor of the United States becomes weaker. Other things equal, that will strengthen the Australian dollar. And we do not need a stronger Australian dollar at this juncture.”

Following Suit

Harper, who is dean of Melbourne Business School and co-dean of the University of Melbourne’s Faculty of Business and Economics, said this was one reason the RBA had resumed easing. It couldn’t stand aside while major counterparts began doing so, or the currency would spike.

“This economy is extremely sensitive to the exchange rate,” said Harper, one of six independent directors on a nine-member panel that includes Lowe, Deputy Governor Guy Debelle and Secretary to the Treasury Steven Kennedy.

The currency “is staying low, where it has been for quite some time as you can see, which is right where we want it,” he said. “That is to say, I’d like it a bit weaker; what I wouldn’t like to see it do is strengthen.”

To contact the reporters on this story: Matthew Burgess in Melbourne at mburgess46@bloomberg.net;Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold

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