Australian central bank board member John Edwards has expressed concern that the Australian dollar reached a three-month high due to US Federal Reserve's shocking decision to continue injecting billions into the global financial markets.
The higher Aussie dollar is likely to frustrate the new government, which wants a lower currency to make Australian manufacturers, tourism operators and other companies more competitive than their foreign counterparts.
"I want to see a lower dollar and it's going to take us longer to get there, so it's not great," said Edwards, an economic adviser to former Prime Minister Paul Keating.
The U.S. decision of not to wind back the quantitative easing sent tremors through financial markets around the world, increased the chances of more interest rate cuts by the Australian central bank and pushed the dollar above 95 US cents.
Westpac Bank foreign exchange strategist Richard Franulovich predicted the dollar would climb back towards parity with the US dollar.
"Look for currencies like the Aussie, Kiwi and some key emerging market currencies to trade on the front foot against the US dollar and they could see gains in the order of several percentage points over the coming weeks," he said.
Another bullish currency forecaster, UBS, maintains that the dollar could reach around 98 U.S. cents by the end of this year.
The decision wrong-footed most financial market forecasters and inflamed debate about a global currency war, where countries manipulate their currencies lower to boost exports.
At an APEC finance ministers' meeting in Bali, Treasurer Joe Hockey discussed the consequences for the global economy with counterparts from China, Indonesia and Singapore, whose economies are vulnerable to a switch in capital to the U.S. economy if rates there start to rise again.
Talking with Indonesian Minister of Finance Chatib Basri, Hocky said, "While there are some positive economic signs coming from Japan and the U.S., we still face difficult and potentially volatile economic conditions globally."
A spokesman for Hockey said the U.S. move had been a "source of significant conversation" among APEC finance ministers meeting in Bali.
Richard Goyder, chief executive of Wesfarmers, the country's largest public company, urged the central bank to hold its nerve and avoid further rate cuts.
"If I were the RBA, I'd be advocating for a good open economy that allows us to adapt and not just rely on monetary policy," which can have unintended consequences, he said.
Westpac chief economist Bill Evans, one of a small minority of local analysts to anticipate the Fed move, predicted the RBA would be forced to cut the official interest rate further to 2 percent from the current record low of 2.5 percent, a move that could drive up house prices further and fuel fears of a property bubble.
Edwards downplayed concern about rising property prices, echoing RBA Assistant Governor Malcolm Edey, who said Australia was some way from a house price bubble.
"While you might say that the house price issue is affected by the level of our rates, it's certainly not affected by the level of Fed rates, and what's going on there really is an issue of timing of the normalization of U.S. monetary policy," Edwards said.
Edwards said the Fed was likely to slow bond purchases before the end of the year.
"Whether they taper this month, at the October meeting or the December meeting is more of a detail. The response to this decision, which seems to be universal indignation in markets, will likely prompt them to move faster than not," he said.
In a sign the decision has worried the RBA's policymakers, Edwards said he was disappointed the dollar was back up and "it would have been better to have [the taper] sooner."
Another Australian expert to predict that the Fed wouldn't taper, Colonial First State Global Asset Management's head of rates, Annette Mullen, said she doubts RBA will cut rates because the dollar has crept higher. "Why would you be the Reserve Bank of Australia fighting the Fed? " she said.
Mullen said she believes the Reserve Bank faces a challenging task balancing the prospect of lower borrowing costs, which could spur economic activity but send the wrong message to property investors.
"If you think that housing investment in Australia has improved in recent weeks, you probably don't want to facilitate that," she said.