The Australian dollar is tipped to slide as low as US85¢ within the next year as the currency rediscovers its historic link to commodity prices.
Analysts have sharply revised down their forecasts for the currency, as the local sharemarket fell for the fourth straight day on Friday and notched its biggest weekly loss in 18 months.
The benchmark S&P/ASX200 index fell 1.5 per cent, to 4964.3, ending below 5000 points for the first time in a month. This took total losses for the week to 3.8 per cent. The broader All Ords was down 78.9 points, or 1.6 per cent, to 4983.5. After a brief rally on Friday, the dollar pulled back late in the session to US96.86¢, to trade near one-year lows.
The Australian dollar has taken a wild ride this month amid global expectations the US Federal Reserve is poised to reduce its massive stimulus program. This program - which has seen $US85 billion ($87.7 billion) a month pumped into the economy has kept the US dollar low. At the same time there are growing fears that the economy of Australia's biggest trading partner, China, could be rapidly slowing - a factor which has been playing havoc with bulk commodity prices.
Brokerage Credit Suisse is the most bearish on the outlook for the Australian dollar, with the global investment bank predicting it to shift to a low of US85¢ by next May.
Credit Suisse said it had been "too timid" in previous forecasts, noting the structural fall in the dollar has happened faster than was expected. It predicted the dollar to fall to US92¢ in the next three months.
HSBC said strength in the US dollar would be the key driver for the direction of the local unit. It lowered its year-end estimate for the Australian dollar to US90¢ from US95¢.
UBS, meanwhile, revised down its year-end and mid-2014 forecasts to US95¢ and US90¢ respectively.
The weaker dollar is also expected to reduce the likelihood of a back-to-back interest rate cut at the Reserve Bank board meeting in June, ANZ senior economist Riki Polygenis said. But continued weakness in the Australian economy meant another 25-basis-points rate cut before the end of the year remained likely, she added.
HSBC flagged Australia's entry into the global "currency war" following the Reserve Bank's move to slash interest rates earlier this month. Since the decision, the currency has fallen nearly 6 per cent. The bank said the success of central banks in influencing the foreign exchange market - sparked off by the Swiss National Bank's success in capping the franc - coupled with low inflation has kept the "currency war" going.
Analysts said the Australian dollar's fall has also reopened the door to its link with commodity prices. In the past two years, the currency has remained strong despite the weakness in commodity prices, defying the historical correlation between the two. But that divergence - a result of higher Australian interest rates compared with other countries, Australia's "safe haven" image and the mining investment boom - is ending, Credit Suisse analysts said.
"The Australian dollar has weathered commodity price weakness before, but this time around portfolio inflows are too feeble to provide an effective counterbalance," UBS said.
Meanwhile, former fund manager from Colonial First State Greg Perry raised doubts over whether investors would continue to bid up Australian stocks by chasing high-yielding shares.
Mr Perry questioned how much further the run of yield-induced gains had to run, saying the dynamic was "very mature".
"I wonder where you stop," he said at a Wilson HTM conference in Sydney.
Mr Perry, one of the nation's best stock-pickers in the 1990s, was more confident about the outlook for the US economy. He said any moves by Federal Reserve chairman Ben Bernanke to pull back on bond-buying would reflect strength in the US. "The fact is if Ben does take away the punch bowl, he must be confident the economy is growing," he said.
The comments reflected concerns among some investors that high-yield stocks - banks in particular - have been overbought. There are also concerns the sharp fall in the dollar could increase inflation in Australia, lowering the chances of further rate cuts and making high-yielding equities less attractive.
Against this, Ben Griffiths, a portfolio manager at Eley Griffiths Group, said inflation was not a current threat and any further reductions in the cash rate would still make high-yielding stocks attractive to investors.