The dollar slipped yesterday as Mr Wheeler made a speech on the dairy industry to DairyNZ's Farmers Forum in Hamilton, falling as low as US86.95c from US87.41c. It finished trading at US86.92c.
The bank considered New Zealand's exchange rate was overvalued and did not believe its current level was sustainable, Mr Wheeler said.
It could weaken if the United States economy continued to improve, global dairy prices continued to come off their recent highs, China's growth slowed, financial market volatility began to rise, or there was a global ''risk off'' event such as a correction in global equity prices.
If the exchange rate remained strong, it was likely to be reflected in continued low or negative tradeables inflation.
''In such circumstances, the high exchange rate, along with new economic data, will be a factor in our assessment of the extent and speed with which the official cash rate needs to be raised,'' Mr Wheeler said.
If the currency remained high in the face of ''worsening fundamentals'', such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars, he said.
The dairy industry was experiencing prosperous times and the future looked bright, but there were important challenges to manage, Mr Wheeler said.
They included oscillations in global dairy prices, the competition farmers would increasingly face from other international suppliers, and the need to continue diversifying New Zealand's export markets and positioning for the ''enormous'' longer-term opportunities expected to emerge in the Indian market.
Farmers should be conscious that high dairy prices could turn around quickly, and needed to continue managing their cash flows and borrowings prudently, he said.
Dairy debt had almost trebled over the past decade and stood at $32 billion.
It was concentrated among a small proportion of highly leveraged farms with about half held by only 10% of dairy farmers, he said.
ASB economist Nick Tuffley said intervention in the currency market would have its challenges.
The Reserve Bank was in the midst of a tightening cycle, with a widespread expectation of another 150-200 basis points of official cash rate increases yet to come.
Any attempts at intervention would be ''fighting the underlying interest rate story'' notwithstanding the Reserve Bank's observation that the interest rate cycle was fully priced in and that some analysts believed there was considerable down side risk to the New Zealand dollar, Mr Tuffleysaid.
Westpac senior economist Anne Boniface said the Reserve Bank sounded ''fairly sanguine'' on debt in the dairy industry.
Its view was that dairy farmers were taking a cautious approach in the current cycle, and that farm credit growth remained moderate.
That might mean the bank was less likely to apply LVR (loan-to-value ratio) type restrictions, which have been applied to mortgage lending, to the farm sector, Ms Boniface said.
