21 Feb 2013

Dollar falls after Reserve Bank says overvalued

2:46 pm on 21 February 2013

The New Zealand dollar has fallen after the Reserve Bank Governor said the currency is significantly overvalued and that the central bank will intervene under the right circumstances.

Economists said Governor Graeme Wheeler's speech on Wednesday had reminded the market the central bank had the power to intervene.

The dollar began falling after the speech and by about 6.30am on Thursday was down about 1 cent at US 83.55 cents.

However Mr Wheeler's remarks provided little comfort for those calling for the Reserve Bank to aggressively to bring down the currency.

He said cutting interest rates or printing money is likely to bring only temporary relief, if any, and could result in higher inflation and interest rates in the longer term.

Mr Wheeler said Australia's recent interest rates drop has had little effect on that country's currency.

He said the Kiwi's strength partly reflects a weak US dollar and New Zealand's stronger terms of trade, which makes it difficult to lower the exchange rate.

Manufacturers have been hard hit in recent times, but Mr Wheeler says the dollar is only one potential cause and notes the sector's relative importance has diminished in developed nations in the last 40 years.

He said the link between the construction and manufacturing sectors is relatively strong, and the $30 billion rebuilding of Christchurch should substantially boost the sector's fortunes.