David James Connolly
1983: The Australian dollar floats free
From Monday the value of the dollar will be set by the forces of the currency market and could at times fluctuate wildly.
With this radical move comes the scrapping of a wide range of controls on currency movements in and out of Australia. For instance, banks will be permitted to offer customers accounts in foreign currencies.
The Treasurer, Mr. Keating, said massive capital inflow, much of it speculative, had brought forward the Government’s consideration of floating the dollar.
The inflow had totaled $1500 million over the past seven or eight days and added a full 2 per cent to the money supply growth rate, which was already pushed above the target range of 9 to 11 per cent set it the budget.
The Government in the early hours of yesterday morning decided to suspend currency trading yesterday after receiving advice that $350 million of foreign capital had flowed into Australia on Thursday and that even more was likely to cross the exchanges yesterday.
This allowed the Government to consider a solution in meetings with the Reserve Bank and Treasury officials, and late yesterday afternoon at a meeting of the economic policy committee of Cabinet.
In two landmark decisions in less than one-and-a-half months the Government has done away with almost all controls on currency flows, and handed control of its value to the market.
In doing so, it has relinquished its ability to manipulate the dollar’s value, an important economic policy tool, as the former Government largely did with interest rates.
The first decision, announced on 28 October, went halfway towards a full float. But as Mr. Keating said yesterday, that system could not cope with the volatility of money flows and the speculation. Instead of being in control of the dollar the Government was “pushed along by speculators.”
He said that with the dollar floating free, the speculators would be speculating against each other.
Bankers were rocked by the decision. Many expected the Government to move further towards removing controls and allowing the market to set the exchange rate, but not to make the change in one step without some interim controls.
“I’m absolutely staggered,” said one senior banker. “I’m not sure they know what they have done.”
He said the market would now apply controls on the Government, rather than the reverse.
The main changes announced yesterday are:
Restrictions on the timing of trade and other payments overseas have been removed.
Residents will no longer require Reserve Bank approval to make any money deal with someone living overseas.
Remaining restrictions on overseas share investment by Australians have been removed.
Loans to overseas residents will be allowed.
Local financial institutions will be permitted to offer foreign currency accounts.
Some bankers predicted that the decision would mean that the Government would now have to issue several new banking licenses, including some to foreign banks, to broaden the currency market.
The Government will very soon be considering the report of the Martin committee which was set up to examine further the Campbell report’s recommendations to allow the entry of foreign banks to Australia.
The Martin report is expected to endorse the Campbell recommendation, but the Government appears to have set itself on the road with yesterday’s decision.
Many bankers were confused last night about the details and implementation of the new system. Australian trading banks’ foreign exchange dealing desks were manned, but were inactive last night.
Mr. Keating indicated that representations made to the Government yesterday had played a part in the decision. Both the National Farmers’ Federation and the influential Business Council of Australia yesterday had urged the Government to float the dollar and remove controls.
Most overseas transactions will still require Reserve Bank approval “for the time being,” although approval will usually be readily available. This will allow the Government some control over tax and foreign-investment policies.
The Reserve Bank will have discussions with the major banks over the weekend to detail the new system before trading resumes.
Mr. Keating yesterday established a policy of not forecasting the likely movements of the dollar, a practice which has also been adopted with interest rates.
The Primary Industry Minister, Mr. Kerin, said the decision was the best one in the long-term interests of Australia’s farmers.
What the float means
Value of the Australian dollar becomes much more volatile.
When the dollar rises, it will hurt mining companies and farmers who export their produce, as their foreign income will be less in Australian dollars.
When the dollar falls, these producers benefit.
If the dollar is strong, it will help importers, as they will have to pay less for imports.
A strong dollar hurts domestic manufacturers who compete against imported goods, as imports would be cheaper.
All this reverses if the dollar is weak. Exporters benefit and importers lose.
How the crisis arose
Speculation on the dollar started on Tuesday of last week and gathered pace on the Wednesday and Thursday.
About $1500 million flowed into the country in the ensuing week.
On Friday night last week speculation reached fever pitch: in London and New York the Australian dollar traded around 94 US cents – well above what Australia’s Reserve Bank said it was worth.
Throughout the week the domestic money market was flooded with speculative money. But the Reserve kept on devaluing the dollar and inflicting massive paper losses on the speculators.
This worked until Thursday, when about $350 million came in. Things had gone too far.
Yesterday the Reserve Bank said trading in foreign currency had been suspended.
Float announced 5:45 pm yesterday.
David James Connolly