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RBA hoards reserves in 'passive' intervention

Chris Zappone  Sydney Morning Herald  October 29, 2012

The Reserve Bank has built up more than $800 million in foreign reserves in the past two months, in a "passive" effort to weaken the Aussie dollar.

While avoiding outright intervention in the currency markets, RBA data shows that the central bank has accumulated $863 million in August and September, compared to the post-January 2010 pace of $54 million a month.

The increase of foreign reserves is seen as a way to put pressure on the buoyant dollar, easing some of the pain local export industries, tourism and retailers are facing.

"This can be viewed as a covert and passive intervention in the Australian dollar of modest proportions, but nevertheless is a clear signal of a change in the RBA's view and intentions," said ANZ foreign exchange strategist Andrew Salter.

"The RBA is not actively attempting to influence the level of the exchange rate," he said. "But by electing to reduce additional demand for the currency in the market, it is 'leaning' against the Australian dollar's appreciation."

The strong dollar has hammered Australia's export industries in the past few years, as a combination of the commodities boom, Australia's high relative interest rates and a global search for higher yields has pinned the currency's value above parity with the US dollar.

Its strength marks a change from the dollar's post-float average value of 72 US cents - a level on which many industries forecast in making business plans and forecasts. The recent strength in the dollar has also not been brought to heel by lower official rates either.

Despite the RBA's "passive" action, the Aussie is currently trading at $US1.036, nearly the same level as before the RBA cut the cash rate on October 2, an action that typically weighs on the dollar.

HSBC chief economist Paul Bloxham said the RBA's decision to pile up foreign reserves, while not buying more Australia dollars was "part of the reserve management process".

"The RBA is not targeting a level of the currency," said Mr Bloxham. "That would make it explicit intervention."

The RBA has dismissed the idea of direct invention in the market at the current levels, citing the cost and the questionable efficacy in lowering the dollar's value at this time. However, the RBA did intervene to support the dollar in 2008 during the financial crisis.

In recent months, currencies have been devalued by central banks with the goal of making a nation's exports more competitive, such as in Japan, or spurring economies, such as through the quantitative easing programs in by the central banks of the US and UK.

Last modified onTuesday, 28 May 2013 09:24

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