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Dollar exchange rate ‘in the ballpark’: RBA

The dollar is at levels consistent with Australia’s strong terms of trade, Reserve Bank assistant governor Guy Debelle says.

Mr Debelle told a conference in Sydney today that changes in the composition of capital flows, including bank funding sources, had affected the value of the currency.

Because of that, it was hard to tell whether the currency was overvalued or not. But “the exchange rate is in the ballpark where you’d expect it to be given the rise in the terms of trade,” he said.

While Australia’s terms of trade, or the ratio of export prices to import prices, peaked last year, it is expected to stay at very high levels.

At the peak, it represented an annual income boost of between 12 to 15 per cent of Australia’s $1.4 trillion in gross domestic product (GDP).

This is driven by a once-in-a-lifetime investment boom in the resources sector as miners dig deep to meet voracious demand from Asia, particularly China.

The dollar traded around $US1.0500 today. It broke above parity in late 2010 and went on to hit a post-float high of $US1.1081 last year.

Mr Debelle also played down worries about growing foreign demand for Australian government bonds, saying those buyers were mainly sovereign wealth funds that tended to buy and hold.

“They’re pretty sticky investors,” he said.

Australia’s AAA-rated government bonds have become highly sought after as the pool of top-rated countries shrink following the recent downgrade of the United States and France.

Mr Debelle also repeated some of the comments he made last week on bank funding.

He said the RBA could check the pressure private banks were under, but not necessarily how this would manifest itself in bank lending rates.

‘‘We can estimate what’s happening with funding costs with a reasonable degree of accuracy,’’ he said. ‘‘The idea that a particular quantum of change in funding costs automatically maps through to a change in lending rates is also not right – it presumes there’s some magical predetermined … margin for the banking system which is always being maintained.’’

Instead, banks acted independently in deciding how costs would flow through, Dr Debelle said.

‘‘One of the factors on the deposit side is competitive premiums,’’ he said. ‘‘Whether that manifests itself in narrower margins or whether you’re able to pass it all through to lending rates is a decision for the banks.

‘‘We’re not going to be able to calibrate things so finely, or to be so confident in saying our forecast is funding costs are going to rise by 10 basis points over a certain number of months and we’re going to pre-empt that.’’

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