Chinese devaluation could knock Aussie down to US50¢

THE Australian dollar could fall as low as US50¢ before the decade is out should China ramp up efforts to devalue its own currency and curb its demand for our key export commodities, fresh analysis suggests.

And with both nations grappling ballooning debt levels, the Reserve Bank could be forced to keep interest rates lower for longer to help ease the burden of repayments, in turn applying further downward pressure on the dollar.

The Aussie has endured wide swings over the past couple of decades, having briefly dipped below US50¢ at the start of the millennium only to power past the greenback in late 2010, remaining above parity for two and a half years.

At yesterday’s value of US75.5¢, it is about 38 per cent off its most recent highs.

However, according to CME Group senior economist Erink Norland, it would be wrong to assume its bear market is nearing an end.

“Given Australia’s dependence on the export of raw materials to China and the country’s rising debt burden, we wonder if the Australian dollar risks retesting its lows of around US50¢ this decade,” Mr Norland said.

The currency’s fortunes are heavily linked to commodity prices such as iron ore, he said. Shipments of the key steelmaking ingredient helped to sustain the economy through the financial crisis thanks to an insatiable demand from top trading partner, China.

But China went on a “phenomenal” credit binge to fuel the housing construction boom that gobbled up those mountains of Aussie iron ore.

“This may be coming to an end soon to the likely detriment of commodities and the Australian dollar,” Mr Norland said.

“When China some day devalues its currency, it will likely send shockwaves through commodity markets, emerging markets and the Aussie-US market,” Mr Norland said.

Bloomberg expects the dollar to average no lower than US74¢ throughout the coming three years.