Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push it down to minimise the recession he sees coming as the mining boom goes bust.
Professor Garnaut, of the University of Melbourne, says he would rather see the RBA cushion the economy's looming fall and bring down the overvalued dollar by cutting interest rates sharply to bring them closer to those of other Western countries.
In 1983, as economic adviser to prime minister Bob Hawke, Professor Garnaut urged his boss to float the dollar, and still views it as one of Australia's great successes.
But if conventional means fail to cut the dollar's value and relieve the pressure on other tradeable industries, he told a seminar at the Australian National University, the Reserve should consider following its Swiss counterpart's example and put a cap on the dollar's value.
Professor Garnaut - the former chairman of Lihir Gold, Australian ambassador to China and the author of an influential report urging Australia to focus on exports to north-east Asia - warns that the "China resources boom" is about to bust, and will bring Australia down with it.
While the International Monetary Fund forecast overnight that Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent in 2014, Professor Garnaut warned that mining investment would plunge from 8 per cent of GDP to its long-term average of 2 per cent.
He said the fall in China's use of coal in electricity generation last year was a forerunner of its shift to a less resource-intensive phase of growth, which would trigger a plunge in Australian mining investment. "We can be pretty sure that we'll be [losing] 5 or 6 per cent of GDP from expenditure, and that's one hell of a fall," he said.
The Reserve's assistant governor for financial markets, Guy Debelle, told the Melbourne Institute that the way mining companies have financed the resources boom has contributed to pushing the dollar's value to a level "higher than one would expect, given [the] fundamentals".
Dr Debelle said 75 per cent of the record investment by mining companies since 2003 had been financed from cash flow. As the mining industry is overwhelmingly foreign-owned, the RBA estimates that 80 per cent of the investment was funded by overseas owners and lenders.
He would not estimate how much it had raised the dollar's value, but ranked it with the massive foreign purchases of Australian government bonds as one of the key factors holding up the dollar's value despite sharp falls in commodity prices and interest rates.