Who will stop the dollar's carnage?

When the Australian dollar hit US95c last night, it must have sent a shiver through our politicians and Reserve Bank officials.

Our export industries, including tourism and education, are being killed because our currency has become a pawn in the global money wars. 

And we just keep copping it on the chin. But at some point -- whether it is at US95c, parity, or even higher -- the Reserve Bank and the government are going to have to recognise we are in a currency war and take evasive action to protect the employment of our people.

But in fairness to all, Australia is caught in a serious currency/interest rate bind. In Europe, the game that everyone in the money markets loves to play is to borrow at the token European rates and invest in higher Australian interest rates.

Of course, you get an extra bonus when there is good news out of China, as happened last night (Aust dollar hits US95c, July 2).

And as the higher Australian dollar bites into our export industries, normally the Reserve Bank would end the game and lower interest rates.

But it currently believes such a step is too dangerous because it might create a residential property bubble. 

The Australian dollar’s strength is persisting because the money wars are combined with the last phase of the mining investment and Chinese desperation to buy Australian residential property.

Chinese and other Asian investors are not only buying existing dwellings but have doubled the price of inner-city development land in Melbourne and Sydney (where building permits have been obtained), and are planning new developments funded by Chinese banks who have access to token interest rates.

This Chinese money is combining with local investors' money to drive dwelling prices higher in Sydney, while holding them in Melbourne. A fall in interest rates would set the dwelling market alight and almost certainly create a residential property bubble.

The government could limit the property bubble crunch by changing the negative gearing rules and/or curbing superannuation borrowing to invest in residential property.

To the extent that any such changes require Senate approval, South Australian Senator Bob Day will be pressing for fundamental change.

Day has a clear policy to reverse rising youth unemployment and boost first home buying. He is biased, of course, because he runs a home building business. He set out his plan in his KGB interview.

In essence, the Day plan is to free up outer suburban land in order to substantially lower the cost of houses, while making it much more practical to train apprentices.

My guess is that for the moment, the Reserve Bank and the government will sit back and hope for a miracle. But a miracle does not look likely. At some point, the Australian government and the Reserve Bank will have to decide that enough is enough and give the Reserve Bank the scope to lower interest rates and not create a property bubble. The politics will not be easy.