Rate cuts not the answer to high $A

A large fall in the dollar could be triggered by the spread of information about Australia's worse-than-expected fiscal position, or by further weakening of the Chinese economy, with further falls in commodity prices, or by a wage break-out.

Whatever the precise cause, or mix of causes, a large fall in the dollar would create fresh dilemmas for the RBA.

The RBA struggled to find a good answer when the effects of financial deregulation destroyed its ability to achieve the "money growth projections" imposed by government from the mid-70s to the mid-80s. Now, following a large fall in the value of the dollar, the bank would have to at least suspend the inflation target, or exclude traded goods, risking red faces or worse.

Even assuming this could be handled without serious loss of credibility, can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate?

The market will ultimately decide these things, but allowing completely free trade in capital when the currency is clearly overvalued is like taking the Ten Commandments too literally.