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RBA's Lowe Warns Of Possible Exchange Rate Overshoot

3/7/2012 1:03 AM ET

The Reserve Bank of Australia Deputy Governor Philip Lowe on Wednesday warned of a possible overshoot by strong Australian dollar and said the authorities should remain alert to such developments.

"It is possible for exchange rates to overshoot," he said in a speech in Sydney. "We need to be alert to the possibility that portfolio flows could push up the exchange rate too far."

"While the evidence of the past 30 years is that movements in the exchange rate have been an important stabilizing force for the Australian economy, the unusual nature of the current forces means that we need to watch things closely," the policymaker noted.

If the unemployment rate were to rise persistently, it might suggest that the contractionary effect of the high exchange rate was more than offsetting the expansionary effect of the investment boom and the terms of trade, Lowe observed.

"If this were to turn out to be the case, monetary policy would have the flexibility to respond provided the inflation outlook remained benign," he said.

by RTT Staff Writer

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