Reserve Intervenes As Grab For Cash Knocks Dollar
Sydney Morning Herald
Tuesday October 28, 2008
THE Reserve Bank has intervened to support the Australian dollar for only the third time since 2001, forced into the market by a swift and brutal re-alignment of global currencies.
The moves by the central bank, on Friday and then again yesterday, came as financial officials from the Group of Seven nations outlined their unease at the rapid rise of the yen, suggesting that co-ordinated intervention in global currencies is under consideration. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G7 statement said. "We continue to monitor markets closely, and co-operate as appropriate." Currencies are the latest victim of worldwide market and economic turbulence. The Australian dollar fell US0.55c to US61.23c yesterday. During the day the currency swung between a late afternoon low of US60.73c and a high of US62.50c. In Friday night's offshore session it slumped to US60.60c, its lowest level since April 2003. Since August the dollar has also dropped almost 50 per cent against the yen. It fell to 55.1 yen during offshore trade, its lowest level since the end of World War II, before ending at 60.9 yen. In share-trading yesterday the benchmark ASX 200 index ended down 1.6 per cent, at its lowest close in nearly four years. The All Ordinaries lost 1.65 per cent. Many analysts are flabbergasted at the size of the currency swings. But what appears to be happening is that investors managing multi-million dollar portfolios are rushing to pull money out of developing economies - and those, such as Australia, linked to them - in a worldwide grab for cash. In response, currencies from Argentina to Ukraine, Brazil to Australia, have tanked. Also, investors are using the dollar as a proxy for growth in developing Asia, meaning that if they cannot liquidate their Asian investments in the face of falling growth they can hedge their position by selling the dollar. "There's been a tremendous flight of capital from the region," said the chief currency strategist at Westpac, Robert Rennie. A spokesman for the Reserve Bank said it had aimed to increase liquidity in the currency market when it intervened to buy Australian dollars. In the past 20 years the Reserve Bank has moved from making small and regular incursions into the market to making large and rare interventions. The most recent foray into currency markets happened last August. Plunging currencies, particularly in Eastern Europe and Latin America, have heightened concerns that a government could soon default on its borrowings. The risk would be accentuated if the government had borrowed heavily in US dollars. "The next areas of real focus will be risks of sovereign default," Mr Rennie said. The director of foreign exchange strategy at ABN AMRO, Greg Gibbs, said the prospect of government intervention should help reduce volatility.
© 2008 Sydney Morning Herald
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