Professor Ross Garnaut, prominent economist and former economic advisor to the Australian government, has said he won't be surprised if the dollar drops to 70 or even 60 US cents.
Professor Garnaut said that after having mining as such a powerful driver in the Australian economy for the past two decades, Australia is ill-equipped to make the hard choices that it needs to in order to regain international competitiveness in the non-mining sectors. "It will take a while for all vestiges of the boom to pass into history but we're already on that downward path". The dollar will likely be affected from the instability and transition away from the sector, particularly as interest rates drop even further.
"Once it starts to fall a lot with a lag, we'll start getting an increase in investment in non-resource export industries. I would be surprised if we are able to make the adjustments we need to make without a real depreciation of 20 to 40 per cent", Garnaut said. This goes against what many currency experts are suggesting, but he said that, "I won't be surprised if before this process is over we see exchange rates against the US dollar with a seven in front. I won't be terribly surprised if there are times when we see it with a six in front".
He went on to say that once the dollar has fallen, the real work of the RBA and government will kick in. The confidence of businesses needed to be picked up and incomes need to be kept down so that Australian businesses can gain competitiveness.
Since the turn of the century, we have seen executive income "blown out" by "many hundreds of per cent" and Professor Garnaut says it "has to come in". This will give an example to the public that incomes are rising too fast and that it represents a real problem to our economy.
Foolish takeaway
If the Aussie dollar does fall that low, don't be surprised if companies in tourism, manufacturing and services all get a boost to their underlying profit. Blue chips like Brambles (ASX: BXB), Cochlear (ASX: COH) and Resmed (ASX: RMD) are likely beneficiaries. I can't see executives giving up their pay packets voluntarily, however some of Google's executives recently declared another year where they will only get paid $1, so perhaps it could happen down under.
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Motley Fool contributor Owen Raszkiewicz owns shares in Cochlear.
