WSJ:Australian Dollar Stays Weak, Raising Inflation Risks
By James Glynn
SYDNEY--The Australian dollar remained near its lowest levels in a year Tuesday amid talk that if the month-long tumble continues, inflation risks would rise.
The Australian currency was trading at US$0.9637 after dipping as low as US$0.9597 in Asia trading. Late Monday, it was trading around US$0.9636.
The Aussie has fallen about 6% against the resurgent U.S. dollar so far in May on increasing expectations the U.S. will soon wind back its economic stimulus measures, and on recent weak economic data from China.
The Australian central bank's interest rate cut earlier this month to a record low 2.75% and talk the country's mining investment boom is ending have also dented confidence in the local dollar.
Australia could be exposed to inflation risks if the currency continues to slide, said UBS chief economist Scott Haslem Tuesday, adding that a fall in the Australian dollar to about US$0.9000 by mid-2014 would add 0.5 percentage point to inflation.
"This has raised questions about the impact this may have on future inflation, the Reserve Bank of Australia's sensitivity to a lower Australian dollar and their willingness to cut the cash rate further," he said.
Inflation is currently about 2.5%, the mid-point of the central bank's 2% to 3% target band. The sober inflation reading is due largely to the high Aussie, which has lowered the price of imported goods.
Weak global demand has also helped to keep the price of some imported goods down.
However, non-tradeable inflation, or that derived from domestic sources, is running at an annual pace of 4.2%. Rising labor costs and utility fees have forced up prices.
"If as we forecast, the Australian dollar trends down to US$0.90 over the coming year, [it] would...present a headwind to the cash rate moving below 2.5%," Mr. Haslem added.
TD Securities head of Asia-Pacific research Annette Beacher lowered her forecast for the Australian dollar on Tuesday to between US$0.9500 and US$1.000 for now, downgrading her earlier view of a US$1.00 to US$1.05 range.
Ms. Beacher said she didn't think the weakness in the Australian dollar was a passing phase. "This time is different. We are not recommending a buy on dip, or in any way challenging recent pricing," she said.
