Australian bank intervenes to save dollar

October 27, 2008

, SYDNEY, October 27 – Australia\’s central bank intervened Monday to prop up the local dollar after it plunged 3.7 percent against the greenback as investors turned it into the whipping boy of the global financial crisis.

The rare intervention by the central bank was aimed at adding liquidity "in an illiquid market", a Reserve Bank of Australia (RBA) spokesman said.

The Aussie was trading at 0.6194 to the greenback at midday (0100 GMT), down nearly two US cents from Friday\’s domestic close of 0.6388, after hitting a five-year low of 0.6060 in US weekend trade, its weakest since April 15, 2003.

Traders could not estimate how much the central bank purchased to support the local unit, but said that relatively small amounts would have sufficed given the very tight liquidity in the market.

"The RBA has essentially shown their hand in the low 0.60s to the US dollar for the Australian dollar, and one might presume they are in a mind to install a sense of stability for the currency at least for the near term," said Greg Gibbs, senior currency strategist at ABN AMRO.

Investors worried that the financial turmoil is deepening are dumping the high-yielding Aussie fast, extending its losses against the strengthening US unit to 37 percent since July, when it threatened parity with the US dollar.

"It is carrying some of the weight of this global financial crisis, there\’s no doubt about that," Australian Treasurer Wayne Swan said Monday of the unit\’s dizzying fall from a high of 0.9849 in mid July.

But even as the dollar sent the prices of imported goods and overseas travel skyrocketing for Australians, Swan said the weaker currency would help exporters and tourism.

"There is a variety of influences on the dollar, and I wouldn\’t speculate on those because in these uncertain times that has its own impact," Swan told Fairfax Radio Network.

"(But) if you are in the tourism industry or an exporter this will certainly provide some relief," he said.

The Aussie, which before the financial crisis had benefited from the soaring price of commodities that drove Australia\’s economy and high domestic interest rates, fell sharply against the yen too, fetching 55.10 yen, down from Friday\’s level of 60.86.

The unit was trading at 0.4915 to the euro, down from around 0.60 less than four months ago.

A flight towards the perceived safety of the US unit amid fears of a global recession combined with the commodities-driven nature of the Australian dollar are battering the unit, CommSec chief economist Craig James said.

"If you\’re heading towards a significant downturn and slipping economic growth, then you\’re likely to use less oil and base metals and as a result there would be less demand for Australian dollars and less demand for the commodities Australia produces," he said.

"People are fearful of countries with high debt and current account deficits … there\’s a lot against the Aussie. There\’s not a lot pushing the currency higher," he added.

Analysts warned that more pressure would come to bear on the Australian dollar this week as the deteriorating outlook for the global economy hits commodities-driven currencies.


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