The RBA in its minutes for the July 2 policy meeting said a steep fall in the Australian dollar would add a little to inflation over time, but not to the extent that it would hamper another cut to interest rates if needed to support demand.
The central bank also said the economy was growing at a below potential base and the outlook for the business environment remained uncertain.
Markets, however, lowered their expectations for a rate cut in August to a 53 percent chance, down from a 63 percent chance before the minutes were released, according to Reuters.
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The Australian dollar is among the world's worst performing major currency this year, 12 percent against the U.S. dollar so far this year, clobbered by falling commodity prices, a slowdown in Australia's top trading partner China and the prospect of the U.S. Federal Reserve scaling back its monetary support.
Gibbs says while the Australian dollar may stabilize around $0.90-$0.93 in the coming weeks as jitters over slowing China's economy wane, the longer term direction for the currency is down.
"As we approach the Federal Open Market Committee in September, when tapering is likely to begin, and perhaps, we see Chinese growth indicators struggle, the Australian dollar will be heading below $0.90. I am forecasting $0.85 at the end of the third quarter, and $0.83 end year," Gibbs said. Bernanke's congressional testimony on Wednesday and Thursday will be closely watched for clues on timing for tapering.
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He added that the currency, which is among the worst performers this year, will continue to come under pressure from the decline in commodity prices.
"Since April, the Australian dollar appears to be trying to reconnect with weak mining and steel sector equities that have sharply under-performed the broader market since 2011. The Australian dollar has further to go to reflect the under-performance of these sectors since mid-2009," he added.