RBA frustrated by dollar rise

The RBA is facing a difficult task as it weighs the Fed’s decision.

Investors around the world embraced the US Federal Reserve’s Open Market Committee’s decision to delay tapering its US$85 billion-a-month bond buying program, with global sharemarkets soaring on the announcement. However, it certainly failed to please the Reserve Bank of Australia (RBA) which would have much preferred the tapering to begin sooner.

As the RBA has progressively lowered the official cash rates to their record low of 2.5%, one of its key focuses has been to lower the value of the Australian dollar. Following the decision, the dollar jumped as high as US95.22c from Wednesday’s US93.58c, representing a 6.2% gain compared to the greenback this month.

Although a stronger Australian dollar may be appealing to online shoppers or importers, it does not fare well for exporters, tourism operators or companies with heavy exposure to overseas markets. As such, the new government as well as the RBA will be frustrated by the Aussie’s recent jump.

According to The Australian Financial Review, Westpac’s (ASX: WBC) chief economist, Bill Evans (who was one of a small number of local analysts to predict the Fed’s decision correctly), believes that the RBA may now be forced to consider reducing the official cash rate to as low as 2% from today’s 2.5%. The RBA has wanted to avoid cutting interest rates any further as it increases the risk of a property price bubble.

Sharing in this view is Wesfarmers’ chief executive Richard Goyder, who has urged the RBA to hold its nerve and avoid any further rate cuts. He said “If I was the RBA I’d be advocating for a good open economy that allows us to adapt and not just rely on monetary policy.”

Foolish takeaway

To balance out the growth across our economy, downwards pressure needs to be applied to the Australian currency. This would drive growth in the mining sector with companies including BHP (ASX: BHP) or Rio Tinto (ASX: RIO) to further improve their international competitiveness.

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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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