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 the currency 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 Reserve cushion the economy's looming fall and bring down the overvalued dollar by cutting interest rates to bring them closer to those of other Western countries.
In 1983, as economic adviser to Bob Hawke, Professor Garnaut urged his boss to float the dollar. He 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.
A former ambassador to China and author of an influential report urging Australia to focus on exports to north-east Asia, Professor Garnaut warns the "China resources boom" is about to go bust, and bring Australia down with it.
While the International Monetary Fund forecast Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent next year, Professor Garnaut warned that mining investment would fall from 8 per cent of gross domestic product back 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 new, 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 bank'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 up 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 has been financed from cash flow. As the mining industry is overwhelmingly foreign-owned, the Reserve 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 the sharp falls in commodity prices and interest rates.
The IMF's World Economic Outlook has trimmed its forecast of global growth this year from 3.5 to 3.3 per cent, but still predicts 4 per cent growth next year.
The IMF warns that while the world has cleared some hurdles, it faces many more, including new risks from the fallout from the Cyprus banking collapse and political deadlock in Italy.