Australia: Sinking dollar raises fears of soaring inflation, rates

By MATT WADE and MICHELLE GRATTAN

The Australian dollar plunged yesterday below US55" for the first time, putting increased pressure on inflation and interest rates.

While the dollar's dive is a bonus for many Olympic visitors whose money will go further, any further weakening could damage the domestic economy, economists warned.

Currency traders blamed large offshore investment banks for the dollar's latest rout as global fund managers shifted their interest to United States investments offering higher returns.

The dollar hit US54.89" in the afternoon before finishing at US54.92", well below the US57.1" it reached when the former treasurer and prime minister Mr Paul Keating made his infamous "banana republic" remark in 1986.

It is now also trading below the previous record low of US55.25" on Wednesday and the US55.30" set during the Asian financial crisis in 1998.

Only speculation that the Reserve Bank had stepped in to prop up the dollar in an effort to protect the exchange rate saved it from falling further.

Because a low dollar makes imports such as many consumer goods, cars and petrol more expensive and stimulates the export sector, it could trigger higher inflation and force the Reserve Bank to lift interest rates.

The weak exchange rate also makes Australian companies more vulnerable to foreign takeovers and local real estate very affordable to offshore investors.

"The Australian dollar has returned to the cellar of world currencies," Commonwealth Securities chief economist Mr Craig James said.

The Federal Opposition Leader, Mr Beazley, said there were many reasons for the low dollar "but underlying it all is that we are not perceived as a new economy".

"If you look at the good growth figures and look underneath those growth figures, they'll all be based on consumption and not investment. And particularly, not investment in the new economy."

Mr Beazley said the dollar was reflecting the fact that the international community "does not judge us as a likely successful nation of this century".

He said a message coming through in World Economic Forum speeches was that "Australia is not a knowledge nation, Australia is not a knowledge economy". Unless it was, it would not be a successful economy and the dollar was be "valued like it is".

But the Treasurer, Mr Costello, has rejected the argument that Australia is an old economy and suffering for it. He said earlier this week that on various new economy measures - Internet use, personal computers and mobile telephones - Australia tended to be second in the world, behind the US.

He also pointed to a recent OECD study which found that Australia was among the six world economies with significant productivity improvements.

Mr Costello has emphasised that an important factor in the low dollar is the very strong US dollar. He has also stressed that it is vital for Australia to have the right policies to deal with the situation.

The NSW executive director of the Australian Retailers' Association, Mr Bill Healey, said the rise in the prices of imported goods would wipe out some of the taxation cuts that had come with the GST.

http://www.smh.com.au/news/0009/15/national/national1.html

-- Carl Jenkins (Somewherepress@aol.com), September 15, 2000