Rba Races To Rescue Sick Dollar

The Age

Tuesday October 28, 2008

By Peter Martin and Eric Johnston

THE Reserve Bank was preparing to intervene in foreign currency markets overnight in a bid to support the ailing Australian dollar as it threatened to crash below 60 US cents to a new five-year low.

The dollar defence came as fallout from the Federal Government's guarantee on bank deposits spread, with another big manager of retirement savings, Colonial First State, freezing withdrawals from its mortgage funds.

But the Government held the line against calls for the bank guarantee to be extended to the billions of dollars now tied up in frozen mortgage funds.

The freeze has left hundreds of thousands of retirees without access to their capital, and has added to the financial pain inflicted by the continuing plunge in the sharemarket.

As shares dived 1.6% yesterday to a four-year low, new figures confirmed record declines in the value of superannuation savings.

A survey of balanced super funds found an average return of minus 11.6% in the year to September - the worst rolling 12-month result since compulsory super began in 1992. And after further heavy falls in share prices this month, the super figures are set to get worse.

But returns have been partially shielded by the plunging dollar, which offsets the impact of losses on super funds' overseas share investments.

The move by the Reserve Bank to support the dollar - only its second co-ordinated intervention since it plunged below 50 US cents in 2001 - began on Friday. But it did not stop the dollar falling through 61 US cents at the weekend to a five-year low of 60.57.

Last night, as the central bank prepared to intervene in the US and British markets, the dollar went lower again, briefly falling to a new five-year low of 60.25 cents in London. By 8.30pm it had recovered slightly to 60.6 cents.

The Reserve stressed it was not trying to support the dollar at any particular level. "What we are doing is providing liquidity to an illiquid market," a spokesman said.

St George Bank chief economist Besa Deda said investors were seeing the Australian dollar as a "proxy" for world growth. "As well, China is one of Australia's key trading partners and there are increasing signs that its economy is slowing. Those worries have spurred selling on commodity markets. This too is pushing the Aussie lower."

The Commonwealth Bank's foreign exchange chief, Richard Grace, warned that the dollar could revisit its all-time low of 49 US cents, and there were risks it could fall further.

Amid the drama over the dollar, the Commonwealth Bank-backed Colonial First State yesterday became the largest manager to be swept up in the funds freeze, locking some 61,000 investors out of their funds.

The move, affecting about $3.3 billion worth of retirement savings in mortgage-style income funds, has added to pressure on the Government to calm nervous investors who are switching to bank deposits that now come with a guarantee.

While talks with investment industry executives continued in Canberra yesterday, Assistant Treasurer Chris Bowen stood firm against extending the Government's deposit guarantee program to other managed investments.

"It has never been our intention to guarantee market-linked investments. There is an important distinction ... a market-linked investment, obviously by its nature, involves some level of risk," he said.

Treasurer Wayne Swan also rejected the plea to extend the guarantee and warned: "There are no instant solutions."

But Mr Swan said: "The Government understands the hardship that people are going through. We are working with the industry as assiduously as we possibly can to see what appropriate steps can be taken".

He appealed to Australians to concentrate on the fact that the "core" of the financial system was secured through the banking guarantee.

Opposition Leader Malcolm Turnbull described the Government's guarantee as a "major blunder", and offered to co-operate with the Prime Minister, while making it clear that this would not mean endorsing everything the Government did.

Mr Swan conceded that his actions in guaranteeing bank deposits were partly responsible for what had happened to market-linked funds, but said other influences were more important.

Colonial, the nation's biggest fund manager, was unable to keep up as the pace of withdrawals intensified over the past week, prompting it to delay processing claims to a quarterly basis to protect the fund.

Colonial said the move followed "the market's reaction to the Government's guarantee on banking deposits and decisions by several fund managers of mortgage funds to suspend redemptions". It said it would continue to pay income distributions to investors.

Since the deposit guarantee program was announced two weeks ago, around $12 billion has flooded out of mortgage funds, mostly into high-yielding term deposits that the Federal Government guarantees.

Mr Swan defended his advice of last week that investors affected by the freezing of funds go to Centrelink, saying his words had been "turned upside down".

"They were meant as a comfort to some in the community who may have suddenly lost altogether an income stream," Mr Swan said.

"And in this frenzied environment, that was turned around by some as me saying that everyone who was in trouble in one of these market-linked investment vehicles should go to Centrelink."

Meanwhile, market analysts are expecting an official interest rate cut of at least 0.5%, and possibly 1%, when the Reserve Bank board holds its next monthly meeting next Tuesday.

© 2008 The Age

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