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Call for intervention misplaced: Treasury


The Department of Treasury has weighed into the debate over the strength of the Australian dollar, believing calls to lower the currency would result in greater instability.

In its quarterly economic roundup released on Friday, Treasury says the value of the dollar must be judged according to whether it is consistent with macroeconomic stability.

"If the high exchange rate is judged to be inconsistent with keeping the economy close to non-inflationary full employment, we could expect that monetary policy would be eased in response, putting downward pressure on the AUD," Treasury said.

Calls for a shift away from a long-standing policy approach and taking action directed at lowering the value of the Australian dollar were "misplaced".

"Rather than helping the economy, the available options are likely to be either ineffective or result in greater macroeconomic instability," it said.

"The combination of flexible inflation-targeting monetary policy and a floating exchange rate has served Australia well in delivering macroeconomic stability through a range of shocks over the past two decades."

One former Reserve Bank of Australia (RBA) board member and trade unions have called for the central bank to intervene to limit the strength of the currency because of the impact it is having on some sectors of the economy, such as manufacturing.

The RBA itself raised concerns in its quarterly statement on monetary policy released last Friday about the strength of the dollar when the terms of trade have peaked, commodity prices are lower and the global economy has weakened.

These factors would have previously led to a softening in the currency.

"Given that it has been at this high level for some time, it is possible that the lagged effect on the economy will be more contractionary than historical relationships might suggest," the cental bank said.