- Written by Michael McAlary
The current discussion on the Australian dollar has focussed on the relationship between Australian interest rates and their relativity to those of our major trading partners. As any one who works in the financial markets knows forward exchange rates are calculated based on interest rate differentials. Whereas, the spot Australian dollar rate reflects any number of factors, both economic, e.g. trade and behavioural. These are cornerstone principles in the operation of foreign exchange markets.
Some commentators are suggesting that the RBA should "print money", as a means of releasing the upward pressure on the Australian dollar. This proposed solution is extraordinary and ignores the fundamental premise that Quantitative Easing (printing money) represents an economic default. The Australian economy's strong performance of the last 25 years is a result of sound macro and micro economic management, not because the RBA, Federal Treasury and the Government of the day have implemented desperate policies that undermine the cornerstone concepts of financial markets. The world is awash with money the impacts of which will be felt for many years. We should not be adding to the problem with ill conceived ideas.