$NZ 'at mercy of global forces'

Reserve Bank Governor Alan Bollard says there is no way a small country like New Zealand can lean against the kind of international forces which are driving exchange rates, here and elsewhere, to "problematic" levels.

He released the bank's six-month financial stability report yesterday.

In recent days the dollar has approached US80c, the level at which the bank intervened in the foreign exchange market in mid-2007.

But on a trade-weighted basis, the currency is still 9 per cent lower than it was then, and 15 per cent lower against the Australian dollar.

It is also supported by high prices for export commodities.

The bank regarded the New Zealand dollar as overvalued, Bollard told Parliament's finance and expenditure select committee, and believed its rise over the past couple of weeks might reflect the financial markets regarding some recent New Zealand data - such as the drop in the unemployment rate from 6.9 to 6.4 per cent - as stronger than the bank does.

He would not rule out intervention.

But the bank has not changed its intervention policy, which is to intervene only when quite stringent tests are satisfied.

One is that the currency is at unjustifiable levels, given where the economy is, and another that the intervention could be expected to be opportune, that is, when the currency is at very top or bottom of the cycle.

On the latter point Bollard noted that large-scale intervention by the Bank of Japan a few weeks ago, and by the Swiss National Bank earlier in the year, had had only a transitory effect.

Nevertheless, he said the high dollar was not helping the rebalancing of the economy that was under way, shifting resources to the export and import-competing sectors and reducing households' appetite for debt and consumption.

There was also an implied swipe at the US Federal Reserve's quantitative easing measures.

"These appear to be supporting risk-asset markets, but they are also putting pressure on capital inflows in third country economies, which is problematic for international rebalancing," Bollard said.

While many Western economies struggled with weak demand, the concern in Australia and emerging Asia had turned to taming overheated domestic asset prices.

"In particular, Chinese property prices have shown spectacular growth over the past year, largely driven by growth in domestic lending.

"A slowdown in China could materially affect New Zealand, especially if New Zealand's export prices fall," the financial stability report says.

Deputy Governor Grant Spencer said the banks were in "pretty good shape".

"The main risks are house prices and agricultural prices, but we don't see either as particularly significant [risks] at the moment."