DOLLAR VALUE SLIPS BELOW THE US GREENBACK

Written on the 15 May 2012

DOLLAR VALUE SLIPS BELOW THE US GREENBACK

THE Australian dollar has dropped below the US greenback for the first time this year.

One dollar was worth 99.99 US cents compared to US$1.0014 at start of trade on Sunday, representing its first decline below parity since December 19, 2011.

The currency’s high value of up to US$1.08 had prompted the Reserve Bank of Australia (RBA) to ask businesses to slash expenses and move workers from non-mining to the mining sectors in a bid to curb inflation.

Deputy governor Phil Lowe suggests the May interest rate cut to 3.75 per cent will not be the RBA’s last, saying underlying inflation will remain low for the next two years.

“The bank’s latest inflation forecast is for underlying inflation, abstracting from the effects of the carbon price, to stay close to its recent rate over the next one to two years,” he told a recent ADC Forum.

Underlying measures of consumer prices rose 2.2 per cent in the 12 months to March 31 – still within the RBA’s target of 2 to 3 per cent.

Lowe concedes the RBA had over-estimated 2011 growth of 4.25 per cent when, in fact, it was only 2.25 per cent due to the Queensland floods. The summer of disasters had hindered coal exports, while investment in housing construction struggled more than expected after the RBA lifted its base interest rate to 4.75 per cent.

The RBA predicts that 50 per cent of mining investment is used to purchase offshore imports, suggesting the resources boom has brought limited economic benefit.


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