Currency Rise Could Hurt Economy: Costello

The Age

Friday February 20, 2004

Josh Gordon, Economics Correspondent

Canberra

Treasurer Peter Costello has warned that Australia's soaring dollar will not only hurt exporters but the broader economy, after the currency this week broke through the key 80 US cents barrier for the first time in seven years.

Lowering the odds that the Reserve will raise interest rates the day after its March 2 board meeting, the dollar hit 80.07 US cents on Wednesday night before easing back yesterday to finish to the day at 79.19 US cents.

Mr Costello said it underlined the need for economic vigilance, warning that a free trade agreement with the US was crucial for exporters now more than ever.

``The fact that the exchange rate has made life more difficult for our exporters will have an effect not only on them but also on the economy," Mr Costello told Parliament. ``It reminds us of the fact that our economic policy must be disciplined."

Farmers and manufacturers are pleading with the Reserve to leave interest rates on hold after two back-to-back increases at the end of last year. They say the rise in the currency has sapped their global competitiveness.

The strong dollar is great for Australians travelling overseas and consumers buying imports. It can also cut the cost of investment, with imported capital goods typically accounting for about half of all investment spending by manufacturers.

But it is bad for exporters because it erodes the international competitiveness of local products, cuts Australian dollar returns for producers paid in foreign currency and increases competition from foreign rivals.

The benefits to consumers were highlighted yesterday by new figures showing car sales leapt by 7.7 per cent in January, the strongest in 12 months. Over the year to January, a record 913,438 vehicles were sold, the Bureau of Statistics said.

CommSec senior economist Craig James said car affordability was close to a 20-year high.

``Low unemployment, rising income and wealth levels, historically low interest rates and a strong Australian dollar are all serving to underpin consumer spending," Mr James said.

But Deputy Prime Minister John Anderson said the dollar was creating ``very great difficulties" for farmers, despite a record winter crop haul. He said he hoped that the Reserve did not cause more pain. ``It remains my fervent hope that as the gap between Australian and overseas interest rates close, so too will the currency discrepancies," Mr Anderson told The Age.

Mr Costello said the rise in the dollar had mainly occurred because the US dollar was falling against the major world currencies and the Australian economy was growing strongly.

The Australian dollar, the strongest performing currency over the past 12 months, is now at the highest level in 15 years against the rest of the world.

The Reserve's Trade Weighted Index - a measure of the dollar's performance relative to the currencies of Australia's major trading partners - closed yesterday at 66.3. Such a level has been matched or exceeded on only seven days since 1985, all in January-February '89 when interest rates were rising rapidly and Australia was a global pin-up.

© 2004 The Age

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