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Australian dollar slips from 2-year high on RBA’s Debelle comments

The Australian dollar fell from a 2-year high on Friday after a top central banker said rate rises overseas did not automatically mean the policy rate in Australia needed to be increased.

Reserve Bank of Australia deputy governor Guy Debelle said in a speech in Adelaide that policy rates were set at a level deemed appropriate to achieve domestic policy objectives.

While global influences, including monetary policy settings in other economies, have a significant impact on that assessment, they are, in the end, only one of a number of considerations to be taken into account.

The Australian dollar fell as much as 1 per cent against its US counterpart during Mr Debelle’s speech, weakening to $0.7881.

The currency has risen 5 per cent in the past two weeks to its highest level since May 2015 as investors took more hawkish comments from European and Canadian central bankers as a signal Australia may join the pack and raise rates.

Mr Debelle also dismissed suggestions that mention of the neutral interest rate in the bank’s July minutes was a signal that it plans to tighten policy.

There was a discussion of the neutral rate at the most recent Board meeting, as detailed in the minutes of the meeting released earlier this week. No significance should be read into the fact the neutral rate was discussed at this particular meeting.

Capital Economics said it doubts the RBA will raise rates before 2019. It said it expects a slowdown in growth in China to push the price of iron ore to around $50 a tonne by the end of the year, which will weaken the Australian dollar.

The recent rise in the Australian dollar to a two-and-a-half year high of just under US$0.80 has been meteoric. But while the dollar may orbit around that level for a bit, we don’t think it will be too long before a reassessment of the outlook for monetary policy and a fall back in the price of iron ore prompts it to glide back down towards US$0.70.