Bloomberg News

Lowe Says Hard to Make Strong Case Australia Dollar Overvalued

July 11, 2012

The Australian dollar’s sustained strength has helped balance the nation’s economic expansion, and it’s difficult to argue that its level is unjustified, Reserve Bank Deputy Governor Philip Lowe said today.

“That’s been an important stabilizing influence in the economy,” he told a forum of economists in Sydney today. “The inflow of foreign capital into the bond market has, at the margin, pushed up the currency a bit. But at least where the currency is at the moment, I think it’s hard to make a strong case that it’s fundamentally overvalued.”

The so-called Aussie has soared 100 percent since the start of 2002 as demand for the country’s iron ore and coal to fuel China and India’s urbanization sent prices for the commodities soaring. The Reserve Bank of Australia has kept interest rates higher than most other developed-world central banks to contain inflation spurred by the export income, further adding to the attractiveness of the currency.

The local dollar bought $1.0244 at 10:57 a.m. in Sydney, little changed from $1.0251 late yesterday in New York. It jumped 5.2 percent in June, the biggest monthly advance since October, even after RBA rate cuts.

The central bank reduced the benchmark rate by 125 basis points from November to June, including a 50-point cut in May designed to help drive down mortgage rates, as Europe’s sovereign-debt crisis slows growth in China, Australia’s biggest trading partner. Non-resource industries have received little respite from the currency, which is trading at a similar level to that after the Nov. 1 quarter-percentage-point cut.

Strong Growth

First-quarter gross domestic product advanced 1.3 percent from the previous three months, a government report showed last month. Compared with a year earlier, the economy expanded 4.3 percent, the fastest annual pace since the third quarter of 2007, the report showed.

The expansion has helped elevate the Aussie 46 percent since 2008, the biggest gain across more than 150 currencies, as overseas buyers raised Australian government bond holdings to A$200 billion ($205 billion) as of March 31, from A$47 billion three years earlier.

“If these flows of capital continue to come in for purely financial reasons, we could face the issue where the currency is higher for purely financial reasons and not because of the fundamentals of the underlying economy,” Lowe said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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