Reserve Bank Governor Graeme Wheeler says the New Zealand dollar exchange rate is "unjustified and unsustainable" and susceptible to a "significant downward adjustment".
Wheeler said the bank would welcome a move towards a more sustainable exchange rate level.
In a statement, Wheeler said that, when assessing the implications of current strength or weakness in the New Zealand dollar, the Bank focuses on two broad concepts -- whether the exchange rate is unjustified, and whether it is unsustainable.
The value of the New Zealand dollar has already dropped sharply since trading at near post-float peaks over US88c in July but dropping below key resistance at US80c has so far been a sticking point. By 2.10pm the currency was at about US80.3c.
Wheeler said the level of the exchange rate was unjustified when it was inconsistent with the economic factors that typically explain its movement during the business cycle.
It was unsustainable when it deviated from its long-run equilibrium level, where it would be expected to settle when business cycle factors have fully dissipated, he said.
"The bank's analysis indicates that the real exchange rate is well above its sustainable level, and also above levels justified by short-term business cycle factors," Wheeler said.
"Unjustified and unsustainable are important considerations in assessing whether exchange rate intervention is feasible," he said.
"Another consideration is whether conditions in the foreign exchange markets are conducive to intervention having an impact on the exchange rate."
He said the real exchange rate has not adjusted materially to the recent downward movement in commodity prices.
For example, global dairy prices have fallen by 45 per cent since February 2014. Despite this, in August, New Zealand's real effective exchange rate was 1 per cent higher than its February 2014 level, he said.
Wheeler said past experience had suggested when the New Zealand dollar began declining from an unjustified and unsustainable level, "the ultimate adjustment can be large".
By Jamie Gray, APNZ business reporter
