Further rate cut unlikely

It is expected that the official cash rate will remain at its current level of 2.75% when the RBA meets on Tuesday, given that the dollar has fallen significantly since its last rate cut.

When the RBA last met in May, the strong Australian dollar was cited as a key reason behind conditions remaining tough for businesses. Whilst the current level of US91c is still quite high when compared to historical figures, the sharp 10% fall over the last month should be enough to hold the central bank from making a further rate cut just yet.

Furthermore, hints that the Federal Reserve will begin to taper off its bond buying program have also heightened uncertainty as to where the dollar will settle. As such, according to analysts from Commonwealth Bank (ASX: CBA) and AMP (ASX: AMP), it seems more likely that the central bank won’t make its next move until August. Inflation figures for the June quarter will be released later this month, which should give the RBA better justification to adjust the rate then.

Whilst the strong Australian dollar has fared well for companies such as Flight Centre (ASX: FLT), it has largely restricted growth in other sectors that heavily rely on international markets for revenue. Companies like biotechnology and medical device group Sirtex Medical (ASX: SRX) and gaming machines manufacturer Aristocrat Leisure (ASX: ALL) rely on a lower Australian dollar to attract international purchases.

Foolish takeaway

Whether it be this month or next, it seems that further pressure will need to be applied to push the dollar downwards and to rebalance the economy. With the mining industry contracting and the boom considered to be well and truly over, growth will need to be recognised in other sectors to drive the economy forward. It seems with the sharp drop and uncertainty as to where the dollar will settle however, that the extra pressure is unlikely to be applied tomorrow.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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