Dollar could drop into 60s: Eslake

The Australian dollar could fall below US70 cents next year as capital inflows subside, economist Saul Eslake told a WA Mining Club lunch in Perth yesterday.

Such a depreciation, from the current level of around US77 cents, would be good news for exporters, including miners and farmers, and those with businesses reliant on tourism.

Western Australians in particular would benefit, with the state accounting for almost half of national merchandise exports, although the fall would make imported goods more expensive.

Mr Eslake said he expected the currency would have fallen to that point already, however large capital inflows had been underpinning the value.

He said that historically, key drivers of fluctuations had been commodity prices and the gap between Australian and US interest rates, but other factors were currently at play.

“The dollar has been held up at higher levels than those fundamentals would’ve warranted by two types of capital inflows that we didn’t see before the onset of the global financial crisis,” Mr Eslake said.

The first was the impact of the budget deficit, with foreign investors buying Australian bonds, which had been paying higher interest rates than in other countries and offered an option for investors to diversify portfolios.

“The other significant inflow has been the financing by multinational energy and mining companies of all that resources investment that’s been occurring,” he said.

The inflow of capital into government bonds would not be certain, although Mr Eslake said it was fairly clear that the flow of foreign resources investment would drastically reduce.

That would reduce demand for the Australian dollar and contribute to a further depreciation.

He said an added effect could be that global investment outflows from China might lead to a devaluation of that currency, which may then put downward pressure on the Australian dollar against other countries.

A depreciation would also be good news for the state government in WA, which had budgeted for an exchange rate of around US76 cents.

According to its most recent sensitivity estimates, an exchange rate of around US68 cents would mean about $460 million more in royalty revenue for the coming financial year.