The Australian dollar slumped below US$0.90 yesterday after Australian central bank governor Glenn Stevens said he wanted to see it at US$0.85 to help stimulate trade-exposed sectors of the economy.
In a wide-ranging interview with the Australian Financial Review, Stevens also said he expected the US Federal Reserve to scale back its stimulus program “before too much longer.”
Speaking just weeks after saying currency intervention was part of his “toolbox,” Stevens said he would prefer a lower dollar over lower interest rates as a mechanism to spur the economy.
“To the extent that we get some more easing in financial conditions, at this point it’s probably more preferable for that to be via a lower currency at the margin than lower interest rates,” he told the newspaper.
Interest rates are at record lows of 2.5 percent after a series of cuts designed to stimulate the economy as its decade-long Asia mining boom cools.
With falling terms of trade, the bank chief said he expected the Australian dollar’s natural level to be lower.
“I thought US$0.85 would be closer to the mark than US$0.95 ... but really, I don’t think we can be that precise,” he said.
His comments sent the currency to a three-and-half-month low. It was trading at US$89.20 late yesterday, down from US$90.31 on Thursday.
The dollar’s earlier strength, despite a fall in commodity prices, has squeezed the Australian economy, eroding government revenues and pressuring industries such as manufacturing, prompting automaker Holden to this week announce it will stop making vehicles in Australia.
Australian Prime Minister Tony Abbott told parliament this week there was scope for the Reserve Bank of Australia to consider “prudent” intervention to push the Aussie lower and he said he was comfortable with Stevens’ comments yesterday.
“I’m very comfortable with what the governor has to say and I don’t believe it’s appropriate for me to add to it or to subtract from it,” he told reporters.
On US monetary policy, which has driven down the value of the US dollar, Stevens said: “I think we could all hope that the Fed will be in a position to do the tapering at some point before too much longer.”
With signs of improved economic activity, investors are tipping the US Federal Reserve to announce a small cut in its stimulus program at next week’s policy-setting meeting.
“When they get to the point where they can do that or begin that, that’s actually a good news story,” Stevens said.