A growing volume of market sales of Australian dollars by the Reserve Bank of Australia (RBA) suggests the central bank would not be especially keen to see a continuation of the rally that lifted the currency by 20 US cents in the three months to early June.

In data released in its monthly bulletin on Thursday, the RBA said it had bought $A1.943 billion of foreign exchange - and sold the same amount of Australia dollars - in net spot foreign exchange transactions in the market in June.

The central bank only began publishing its market foreign exchange transactions from January 1995, but this was the biggest net sale of Australian dollars over that time.

Before that, the RBA had made net purchases of Australian dollars for two consecutive months - October and November last year - as the exchange rate came under pressure when global financial markets fell into disarray after the collapse of US investment bank Lehman Brothers.

Since then, the RBA has taken to opportunity to replenish its foreign exchange reserves with seven consecutive months of net sales of Australian dollars.

The RBA’s holdings of foreign currency are now about $US31.7 billion net of outstanding forward foreign exchange commitments, compared with $US27.8 billion at the end of November.

For the first four months of this year, the Australian dollar sales averaged less than $500 million, but they stepped up to $1.433 billion in May before the further increase in June.

The RBA does not micro-manage the exchange rate.

Even so, the increased volume of sales against the background of a rising exchange rate suggests the RBA’s view is that the currency had begun to probe levels that were increasingly difficult to justify on the basis of economic fundamentals.

The Australian dollar had risen from a low of 62.8 US cents in early March to 82.7 in early June.

Although an overshooting exchange rate could be expected to return, eventually, to more sensible levels, an overvalued currency can inflict economic damage, undermining export competitiveness and diverting domestic demand toward overseas suppliers.

In effect, it is another form of tighter monetary policy, the last thing Australia needs at the moment.

By leaning against the rising exchange rate and topping up its holdings of foreign currency, the RBA has been able to kill two birds with the one stone.

AAP