The Australian dollar’s appreciation against the US dollar (+6.3 per cent) and a basket of trading partner currencies (+5.4 per cent) since November has been striking. It did not prove to be a barrier to the RBA raising interest rates at its February meeting – and nor should it have been.
The main reason for this is simple. The level of the exchange rate, even after the recent rally, remains undervalued and therefore stimulatory for the Australian economy at large. Add to that substantial deficit spending at the federal and state government level, and two of the three main parameters of the aggregate policy stance in Australia are sponsoring excess demand.
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