Jul 2, 2014

The dollar is slowly tightening its grip on Hockey’s forecasts

The persistent strength of the dollar threatens to do to Joe Hockey what it did to Wayne Swan - and the stakes are just as high for the government as they were for Labor, Bernard Keane and Glenn Dyer write.

The Reserve Bank governor's comments yesterday on the refusal of forex markets to take the value of our currency lower would have earned a "hear hear" from Treasury, the government and exporters large and small. Slowly but surely the continuing high value of the dollar is once again tightening its grip the economy and threatens to derail the transition from the dying resources boom to domestic demand. And it will produce a replay of the situation that distorted the budgets of the Labor government from 2011 to 2013. RBA governor Glenn Stevens (and no doubt the RBA board and other senior bank officials) reworked previous comments on the value of the dollar from the June statement to make plain the increasing level of frustration:
"The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy."
Compare that to the June meeting statement:
"The earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices."
In other words, the bank now sees the refusal of the dollar to fall as working against the direction of the economy in that the impact of the depreciation in 2013 is disappearing. And what happened to the value of the dollar after Stevens' statement? Why, it rebounded to a seven month high of 95.05 US cents in US trading -- think of that rise as a sort of two-fingered salute from the forex market to the RBA. The dollar rose because of two factors: the better-than-expected news on the health of Chinese manufacturing and a growing expectation that the next move in local interest rates will be up -- not this year, but sometime in 2015. But the surging dollar, which acts like a rise in interest rates, might have something to do with disproving that expectation wrong, again, as it did in 2011-13. To understand the bank's growing frustration with the dollar's resilience, consider this graph also released yesterday:

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5 thoughts on “The dollar is slowly tightening its grip on Hockey’s forecasts

  1. leon knight

    Could not happen to a more incompetent treasurer, but I doubt that it will cause any improvement in his dishonesty quotient..!!

  2. klewso

    This is Joe.
    Watch Joe run.
    Watch Joe swim the Hellespont of Negativity.
    See how Joe likes it?
    Throw Joe a Lifesaver – or a Fruit Tingle!

  3. AR

    Hey, I’m off O/S until this abomination of a government is put to the stake so bring on parity – it was fun in 2011 when the rest of Europe grovelled for a hard currency.

  4. Simon Mansfield

    The economic elite of Australia – both policy makers and word smiths – have pretty much been wrong on just about everything since the GFC ended the post war economy.

    The roll call of failure should be what Crikey is reporting not the mealy mouth words of two commentators who are trying to outsource their own failures of analysis – to the Stevens, Hockeys of the world.

    Meanwhile, of course the dollar went up in reaction to the RBA statement. Every forex trader and central banker in the world knows that Stevens is an ideological fool who couldn’t kick an empty can of coke two feet.

  5. Dogs breakfast

    Sweet karma if Joe has to face the same external problems that Labor did. Everyone with a slight knowledge of the world economy knew that the revenue bust was a product of external conditions, but not Joe, he knew better, just stop spending was his mantra.

    He looked like a fool the closer he got to the Treasurer’s job, and now that he is there, he is completing the picture.

    Any doubts have been removed.

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