Dollar nears 50¢ but 'no need to panic'

By Tom Allard

The Australian dollar slid perilously close to the psychologically critical level of US50¢ yesterday, rescued by heavy buying in the options markets that some traders attributed to the Reserve Bank.

The continuing woes for the dollar bode ill for inflation and interest rates and make Australian companies cheaper to offshore predators.

Few in the currency market were prepared to predict a turnaround, despite a late rebound yesterday.

Offshore selling drove the dollar down to an all-time low of US50.76¢ early yesterday before large purchases of "strike" options - essentially bets that the dollar will rise in future - prompted an afternoon reversal.

Going into London trading last night, the dollar had climbed again to be close to US52¢.

"I would have to say that the tone is still very, very negative ... probably the worst we have seen for some time," said Merrill Lynch currency strategist Mr David Mozina.

He said the rumoured Reserve Bank buying in the foreign exchange options market could only be considered as temporary relief.

Others said the rebound could have been partly related to the improved election prospects of the US Vice-President, Mr Al Gore. He is viewed as more likely to sanction intervention to deflate the rampant US dollar and boost other currencies.

The plunge in the local currency reflects the strength of the US dollar and reluctance of global investors to buy Australian equities and bonds, seeing higher returns in the US.

Few currency traders regard the slump as a reflection of poor government policy or a negative view on the economy, although concerns about Australia's new-economy credentials have also been pinpointed.

The Labor leader, Mr Beazley, yesterday hammered home the need for more investment in education, industry and research and development, while the Prime Minister said our high use of new technology was all that mattered.

However, Mr Howard conceded: "It's no secret that one of the consequences of a lower dollar, if it's sustained over a long period of time, can be a slightly higher rate of inflation."

The Commonwealth Bank managing director, Mr David Murray, has observed that Australia's big banks, among other companies, are cheap for foreign predators due to the low dollar.

Mr Howard said there was no need to panic and Australia's floating exchange rate regime had served the country well in the past, particularly in helping exporters when their Asian markets dried up during the financial crisis of 1997 and 1998.

Landing at Goondiwindi yesterday, the Treasurer, Mr Costello, said the movements of the Australian dollar compared with the US dollar "are nearly all related to US events rather than Australian events".

"The Australian exchange rate is much more likely to move when some announcement comes out about either a Gore or a Bush presidency," he said.

http://www.smh.com.au/news/0011/23/national/national6.html

-- Martin Thompson (mthom1927@aol.com), November 22, 2000