March 9, 2016 / 3:21 AM / a year ago

Resurgent Aussie dollar whips up crosswinds, RBA on storm watch

SYDNEY, March 9 (Reuters) - The Australian dollar's recent surge has been eye-catching and certainly not something the country's central bank will welcome, but it has yet to reach levels so out of kilter with economic conditions they would force policymakers to act immediately.

The Aussie dollar rallied 4.3 percent last week, posting its best performance in over four years. It came just shy of 75 U.S. cents on Monday, and has gained more than 6 U.S. cents in two months.

The extent of that move has already prompted Capital Economics Chief Economist Paul Dales to predict that the Reserve Bank of Australia (RBA) will soon resume talking the currency down and even "consider the merits of cutting interest rates further."

Yet, RBA Deputy Governor Philip Lowe on Tuesday sounded anything but rattled, saying the currency's rise has been "relatively mild in the overall scheme of things."

"Like everyone, we would welcome a slightly lower exchange rate that would help in the rebalancing of the economy."

Resigned to the fact that central banks across the globe also want a weaker exchange rate, Lowe sensibly admitted that not everyone can win.

His measured remarks contrasted boldly with a comment from RBA board member John Edwards, who last month told The Wall Street Journal he would be more comfortable with the Australian dollar trading around 65 cents.

Comfort factors aside, there are fundamental economic reasons behind the Aussie's rally.

"Like us, the RBA won't have a huge issue rationalising why the currency is up here," said Ray Attrill, global co-head of FX strategy at National Australia Bank.

"Commodity prices have been providing a very positive influence in recent weeks and market risk aversion measures have clearly been easing. So if you put them together, it does an adequate job of justifying this move up."

Iron ore, Australia's single biggest export earner, jumped 20 percent on Monday while Brent crude has popped above $40 a barrel for the first time in 2016, continuing a recovery that started a few weeks ago.

If sustained, such recoveries would improve Australia's terms of trade, further underpinning an economy that had already surprised most observers by growing a brisk 3 percent over 2015.

At the same time, doubts that the U.S. Federal Reserve will be able to hike U.S. interest rates this year have been tempering demand for the U.S. dollar. As a result, analysts said it was no surprise for the Aussie to be where it is now.

Attrill says levels around 75 U.S. cents would be consistent with "fair value" under models followed by the RBA, but any approach toward 80 cents would be harder to justify. Until then, the RBA is likely to lie low. (Reporting by Ian Chua; Editing by Eric Meijer)

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