The Australian dollar has enjoyed a huge surge on the back of booming mining and resources export prices but that is unlikely to happen again, a leading economist says.
AMP chief economist Shane Oliver said the commodity price boom was starting to fade as Chinese economic growth moderates, falling from its stellar highs of a few years ago.
"After doubling in value against the US dollar over the last decade, the best is likely behind for the Australian dollar," he said.
He said when the Reserve Bank of Australia's interest rate was high relative to other countries, the local currency enjoyed good support but that is changing as recent rate cuts start to take affect.
The cash rate is currently three per cent compared with 4.75 per cent almost two-and-half years ago.
The effect of the US Federal Reserve's economic stimulus plan, called quantitative easing (QE), is another factor why the Australian dollar rose to its record levels.
"However, against the US dollar, the impact of quantitative easing may be starting to wane a bit," Dr Oliver said.
"While the first two rounds of quantitative easing in the US were associated with strong gains in the value of the Australian dollar, QE3 (third round) has just seen the currency continue to track sideways in the same $US1.02 to $US1.06 range it has been in since last July.
"The main reason that the impact of quantitative easing may be starting to wane for the Australian dollar is that the interest rate differential in favour of Australia has fallen dramatically as the RBA has cut rates."
After falling to a record low of just under $US0.48 in 2001 the Aussie peaked above $US1.10 in July 2011.
Dr Oliver said is was inevitable that the Australian currency would fall because it has been overvalued in the past few years.
He cites the purchasing power parity (PPP) theory, which is the basis for the better-known Big Mac Index compiled by The Economist magazine.
It is based on the assumption that 100 Australian dollars ought to buy the same basket of goods and services in other countries, once it's converted into foreign currency, as it does in Australia.
Dr Oliver said that, based on PPP, the Australian dollar was currently around 35 per cent overvalued, but if you buy only a Big Mac hamburger it was about 12 per cent overvalued.
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