Reserve Bank governor Glenn Stevens says the Australian dollar is ''too high'', but not so overvalued that it would justify major intervention.
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Reserve Bank Governor Glenn Stevens
The head of Reserve Bank appearing before the House of Representatives Economics Committee.
Mr Stevens told the House of Representatives Standing Committee for Economics this morning that while the dollar was ''somewhat overvalued'', a central bank would have to be very confident its currency was ''seriously overvalued'' before contemplating major intervention.
''It is too high ... on the best metrics that I have available to me, but we are not talking 50 per cent,'' he said, adding that it was ''a bit surprising it hasn't come down''.
''The evidence of history is that if it is overvalued by a long way it is going to come down.''
Mr Stevens added that he was comfortable with the market settings for the dollar and that over history, the markets have been setting prices ''better than we would have had it''.
''The float has served us well and will continue to do so overall.''
The Australian dollar rose by almost half a cent following the Mr Stevens' statement to the committee, and was trading just below $1.03 slightly after noon.
Mr Stevens' comments contrasted with Graeme Wheeler, his counterpart across the Tasman, who said on Wednesday that the New Zealand dollar was significant overvalued.
Mr Wheeler said in a speech in Auckland that there were no simple ways to lower the exchange rate, and ruled out quantitative easing, as his country was not experiencing the same economic struggles as the US and European countries.
He added that quantitative easing by major economics - one of the factors that has seen the Australian dollar remain attractive to investors - was not expected to end in the near future.
"I hope to live to see the day when monetary policies in major economics get normalised," Mr Stevens said.
"If somebody said the current approach to policy in the major countries is likely to go on for a while, I don't disagree with that."
Higher dollar a factor in lower rates
Mr Stevens said in a prepared statement earlier that the higher-than-expected exchange rate ''has been a relevant factor in the setting of interest rates''.
''It is not that interest rates are seeking a particular exchange rate response, but they are being set with a recognition of the exchange rate's effect on the economy,'' he said.
He said the reduction in the cash rate by 175 points since November 2011 meant that there was ''a good deal of interest rate stimulus in the pipeline''.
While there was scope to ease interest rates further given the subdued inflation outlook, the Board had decided it was ''prudent to sit still'', Mr Stevens added during the Canberra hearing.
But Mr Stevens would not rule out changing the cash rate in the lead-up to the election, saying that the Reserve Bank ''has to do its job'' every month.
''If interest rates have to be changed, then they will be changed,'' he told the parliamentary committee.
He added later that the Reserve Bank was still maintaining a bias to ease at this time.
Rates to remain on hold for some time?
CommSec economist Savanth Sebastian said Mr Stevens' statement to the committee today was his clearest indication that interest rates would remain on hold till the middle of 2013 and perhaps later.
''His comments today provided more clarity and reinforced our view that interest rates are solidly on hold in the near term – especially given that the 'substantial' stimulus measures are having an impact on the economy.
''There is certainly no perception that the Reserve Bank maintains either an overly optimistic or overly pessimistic view. … But the Reserve Bank Governor believes we are in a happy place.''
Mr Stevens told the committee it was "too early to tell" if consumers were having a muted response to the current easing cycle.
But he noted that the exchange rate had fallen sharply during the previous set of rate cuts when the global financial crisis was in full swing - unlike its current strength.
'Decline in commodity prices not matched by lower dollar'
Federal Treasurer Wayne Swan also highlighted the strength of the dollar amid the decline in Australia’s terms of trade in a breakfast speech to economists in Sydney today.
Mr Swan said the decline in the terms of trade was not unexpected, but that the decline of global commodity prices without a change in the exchange rate was.
"We saw iron ore prices fall around 40 per cent in the year to September while thermal coal prices fell around 30 per cent. While both have since regained some ground they are still significantly lower than 18 months ago.
"Despite this, the exchange rate has barely budged."