$Aust. crisis not vet resolved

Press, 25 February 1985, Page 36

$Aust. crisis not vet resolved

By

RON CORBEN,

AAP correspondent in Sydney

The crisis surrounding the Australian dollar reached a crescendo this week with the currency being beaten down to a low point eight US cents below its close the previous Friday. Since hitting the post December 1983-float low of 66.00/66.50 US cents the currency has staggered back to between 71.00 to 72.00 US cents. Trading in the dollar ended on Friday on an uncertain note with the market calmer after erratic shifts, mostly downward, against the world’s currencies earlier in the week. The recovery has been as much because of a general change in market sentiment over the dollar’s declining value as to an exhaustion of speculative trading. However, a key element to the greater stability in the currency in the past two days was attributed to astute moves by the trading banks earlier in the week. After watching the dollar fall five US cents from its opening on Monday to its close on Tuesday, and without intervention by the Reserve Bank or Treasury, the chief dealers from the major trading banks on Wednesday morning decided the time was ripe to stop the dollar’s demise. A decision to widen the spread between the buy and sell price for Australian dollars was a move designed to settle the market by chasing out the few remaining speculators. The closer the distance between buy and sell price, usually amounting to five or 10 points, the easier for a speculator to move in and out of the market quickly. With the wider spread the speculators were effectively kept at bay. The move also highlighted the continuing influence the trading banks have over the market because of the large volumes of corporate business that pass through their

hands. The rules drawn up were for the spreads to be of 50 points or 0.5 US cents, with a maximum size of only SUS2.O million trading parcels. At the end of the week the spread, an indicator of the market’s confidence, had only narrowed to 30 points, despite attempts by market participants to narrow the range. According to senior foreign exchange dealers the move came when the shell-shocked market of Wednesday morning had lost general direction with many staying out of the market for fear of further declines in the dollar. One effect of the wider spread quote is to slow down the number of transactions, although it tends to disadvantage the corporate sector wishing to deal. Peter Purtell, the foreign exchange manager for Australian Bank, Ltd, commented at the time that desperate situations required the appropriate measures. The sharp decline in the dollar’s value also provided a reassessment of Australia’s economic performance, along with a mixture of both short term and longer term factors. The short term factors reportedly ranged from a loss of confidence in the Federal Government — especially over the handling of the MX missile crisis — to the Federal public servants’ dispute, and the end of monetary targeting by the Federal Government as perceived by offshore investors. The longer term considerations lay with the large deficit on Australia’s balance of payments, running at an average monthly outflow to meet borrowing repayments of around sAust7so million. Manufacturing accounts for about 20 per cent of Australia’s Gross National Product, but according to

the National Export Marketing Strategy Panel’s report, released last week, exports are only 14 per cent of total manufacturing output compared with New Zealand’s 29 per cent, and the Netherlands’ 48 per cent. When a country’s currency comes under threat, the way the Australian dollar has been, the whole of its productive performance comes under close scrutiny. On a trade-weighted basis, the dollar was quoted by the ANZ Banking Group at 87.93 points, up from Thursday’s 85.31 points but still well down from Monday’s level of 92.10. This is based on December 8, 1983 — the day the dollar was floated — equalling 100 points. Foreign exchange dealers said earlier forecasts this year that the dollar would rise to 84.00 US cents through February from January levels of 81.00 US cents also left many exporters not protected from any sharp fall in the currency because of the costs involved in hedging against the risk. Since the spiralling of the dollar exporters either left their funds offshore or were forced to sell Australian dollars at a much lower rate — exacerbating the currency’s decline. Above all the problem facing the Australian dollar is the continuing strength of its American counterpart. The US dollar has in recent months continued to surge against the world’s currencies with the main attraction for international investors the interest rates generated by the Federal budget deficit, estimated at around SUSIBO billion and the continuing growth of the US economy.