Quantitative easing in the US, or more commonly known to the layman as “printing money” has sent the Aussie dollar soaring to a new record high against the greenback at US$1.0176. The currency was worth half a US dollar just nine years ago.
The Federal Reserve announced yesterday that it will pump a further US$600 billion into the US economy by buying Treasury bonds over the next few months. This move is in addition to some US$2.6 trillion already spent in trying to kickstart the waning US economy since the Global Financial Crisis.
Interest rates in the US are already close to zero percent which is a similar situation to most countries in the developed world. As the Australian economy continues to strengthen on the back of strong trading with its majors partners in China and India, The Reserve Bank of Australia took the conservative move on Tuesday 2 November 2010 to increase its cash rate by a further 25 basis points, its first since May 2010 and its seventh since September 2010, bring the official cash rate to 4.75%. The RBA said key factors affecting this prudent measure included:
- The global economy grew faster than trend in the year to June 2010
- Expectations of a slowing Chinese economy have lessened recently
- Most commodity prices have firmed after earlier falls during the year
- Demand for labour has continued to firm and envisaged further strengthening based on trends in job vacancies.
- The terms of trade are at their highest levels since the early 1950s and is reflected by the strong exchange rate
HSBC said emerging markets and commodity exporters such as Australia are opting for “quantitative tightening” to offset the effects of quantitative easing in the US, which is causing a flood of money to flow into faster growing economies.
Meanwhile, India’s central bank has also tightened monetary policy by raising interest rates by 25 basis points to 6.25%. It has imposed draconian housing curbs to reduce “excessive leveraging” and prick the bubble, limiting mortgages to 80% of property values.
- Statement by Glenn Stevens, Governor on Monetary Policy Decision, 2 November 2010
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- Aussie dollar hits parity with greenback