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: