Markets: Deverell dials down the dollar

Credit Suisse's head of foreign exchange strategy says the Reserve Bank will be happy with the falling dollar, which should reach 75 US cents in 12 months.

The Australian dollar’s 12.2 per cent fall since April 1 is all going according to the Reserve Bank of Australia’s plan, says Ric Deverell, a former deputy head of economic analysis at the Reserve Bank and now Credit Suisse’s head of foreign exchange strategy.

The central bank needed the currency trading above parity to the US dollar as the mining investment boom threatened to unleash inflation, Deverell said. Now that mining investment is peaking, other parts of the economy need to be stimulated, he told Markets Spectator. The non-mining sector of the Australian economy is more exchange rate rather than interest rate sensitive, the London-based Deverell added.

“I would be much more worried about the Australian economy if the exchange rate did not fall further,” says Deverell, who forecasts the Australian dollar will trade at 75 US cents in 12 months’ time. “The risk is that it will happen faster than that,” he says.

On a purchasing power parity basis, Deverell says the Australian dollar should trade at US cents 68. “This would not be bearish for Australia,” he says. “It’s exactly what Australia needs. It is a very necessary thing”. Deverell says Australia, especially major cities such as Sydney, run the risk of becoming too expensive a place to do business with a currency trading above parity to the US dollar.

At 1014 AEST the Australian dollar was trading at 91.48 US cents, up from 91.47 US cents yesterday, according to Bloomberg data.

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