Australia: $A's new low fuels inflation fears

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$A's new low fuels inflation fears

By Corinne Lim and Bill McConnell

The Australian dollar fell to another record low on Friday, hitting US52.80" in tandem with the euro's fall below US87.0".

The fall in currencies came as the European Central Bank surprised financial markets by lifting rates on Thursday night. Both currencies strengthened initially but fell as markets worried that the ECB's rate rise would hurt the euro zone's economic growth.

The Prime Minister, Mr John Howard, on Friday declined to comment on the dollar but the Opposition used the slide to revive calls for increased spending on research and development to help remove international perceptions of Australia as an old economy.

"Peter Costello's only solution has been to jawbone the markets out of their belief that Australia is an old economy," the Shadow Treasurer, Mr Simon Crean, said.

"What he doesn't understand is you need to do more than buy a mobile phone and a laptop to become a new economy."

Market analysts believe the $A's chronic weakness reflects the robustness of the US economy and Australia's stodgy image as a commodity producer.

Global investors have flocked to US assets and markets and have mostly bypassed Australia.

"Global investment markets are still in love with US assets. US productivity is outstripping global trends," said Mr David Mozina, fixed income and foreign exchange strategist at Merrill Lynch.

The dollar's dive since January 1 - more than 20 per cent against the US dollar and 12 per cent against the yen - has sparked concerns about its impact on inflation.

In August the Reserve Bank of Australia raised interest rates by 25 basis points and issued a strongly worded statement about the risk for higher inflation. It said sustained weakness in the $A would place pressure on the price of imported goods.

A lower currency increases import prices in Australian dollar terms. Some importers, retailers and wholesalers absorb part of the increase through lower profit margins. But some of the increase finds its way to higher prices on the shelf.

Goods such as transport equipment, fuel, telecommunications equipment and machinery will rise.

Chief economist at BT Funds Management, Dr Chris Caton, said the depreciation was one of a series of threats to inflation, of which each individually was relatively minor.

"Put them together and we have a potential problem with ongoing inflation in this country," he said.

-- Carl Jenkins (Somewherepress@aol.com), October 08, 2000


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