Business

RB head warns dollar could crash

17:53 pm on 25 September 2014

The New Zealand dollar is unjustified and unsustainable, Reserve Bank governor Graeme Wheeler says.

Reserve Bank governor Graeme Wheeler. Photo: RNZ / Diego Opatowski

Mr Wheeler this afternoon warned in a statement the Kiwi susceptible to a significant fall. The dollar fell a nearly half a cent on the news, from 80.67 US cents to 80.21 US cents, and was trading at 79.89 US cents early this evening.

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Mr Wheeler said the real exchange rate was well above its sustainable level according to the central bank's own analysis, and also above levels justified by short-term business cycle factors.

He said the dollar had not adjusted materially to the recent downward movement in commodity prices.

"For example, global dairy prices have fallen by 45 percent since February 2014. Despite this, in August, New Zealand's real effective exchange rate was 1 percent higher than its February 2014 level," he said.

Mr Wheeler said past experience suggested that when the dollar started declining from an unjustified and unsustainable level, the ultimate adjustment could be large.

The dollar has fallen 9 percent since peaking at 88.35 US cents in July.

ASB Bank chief economist Nick Tuffley said Fonterra's downgrade to this season's forecast payout yesterday had spooked investors, and helped the central bank sell its message that the dollar was still far too high.

"Markets have been paying a little bit more attention to the trends in dairy prices and we have, just yesterday, had Fonterra reinforce the income impact on farmers of the decline in global dairy prices."