The high New Zealand dollar is hitting some parts of the economy, but it is not necessarily that overblown, with "fair value" at US74c to US76c, according to a report by ASB Bank.
And based on the bank's view of recovering commodity prices in the coming year, it suggests the currency is likely to stay at about US77c in the near future, according to ASB's latest quarterly forecasts.
The currency was trading at US82.1c yesterday.
The high dollar reflected New Zealand's better economic performance than that of Europe, Britain and the United States, while key commodity export prices are being underpinned by Asian growth.
The dollar reached an all-time peak against the euro in August at just over €0.66, before falling more recently to about €0.63.
As a food exporter, New Zealand's dollar is holding up because of a sustained and potentially long-lasting "structural" shift in the price of food such as dairy products.
ASB's simple estimate of fair value for the dollar is based on relative short-term interest rates in the United States and New Zealand and New Zealand commodity prices in US dollar terms. That suggested a range of US74c to US76c.
But that model takes no account of "quantitative easing" or printing money in the US. A Reserve Bank exercise looking at that factor showed a more stable exchange rate, which was "not out of sync" with the different policies of the Federal Reserve and the Reserve Bank.
The kiwi was also high but broadly in line with the relative purchasing power of New Zealand's commodity exports.
There are some options to bring the currency down, but ASB warns that any engineering of a lower exchange rate essentially cuts New Zealanders' standard of living by raising import prices.
The economic costs of moving away from using monetary policy to target inflation would well outweigh the benefits.
For example, intervening in foreign currency markets to bring the dollar down tends to have little lasting impact and can potentially expose a central bank to large financial losses.
Since 2008, the Swiss National Bank has racked up losses of CHF 20 billion (NZ$26b), largely from the failed intervention in 2010.
Using monetary policy to target the exchange rate instead of inflation would lead to more volatile growth, inflation and interest rates because interest rates would be less driven by the state of the economy.
For example, Hong Kong pegs its dollar to the US and so its interest rates are heavily dictated by US rates, with mortgage rates at just 2 per cent, while property prices have risen 85 per cent since 2009.
REBUILD, FIRMER HOUSING MARKET SPUR RECOVER
The economy will see a gradual recovery, boosted by earthquake rebuilding in Christchurch and a firmer housing market, according to ASB Bank's latest quarterly forecasts.
Despite the backdrop of "ongoing global uncertainty", ASB is forecasting annual economic growth of 2.7 per cent for calendar 2013, rising to 3.3 per cent by the September year 2014.
House building is forecast to grow almost 18 per cent in 2013.
House prices are expected to rise 6 per cent this year, but cool down with just a 2 per cent increase in 2013.
ASB forecasts that the Reserve Bank will keep the official cash rate on hold till September 2013, before gradually lifting it. "Ongoing global risks will need to be weighed against gradual improvement in domestic spending, in an environment where low interest rates are encouraging a recovery in borrowing demand."
In Europe, some of the extreme risks of financial dysfunction had reduced, while the US economy was growing more than 2 per cent, but struggling to create jobs, while the Chinese economy appeared steadier.
In New Zealand, the Canterbury rebuild was getting under way, though unevenly. The Auckland housing market was heating up and there was a growing risk that the big price increase would spark "wealth-related spending".
ASB estimated annual house price inflation in Auckland would peak at just under 12 per cent by the end of this year.
It remained "wary" about the housing market, as mortgage rates remained low.
The strength in the housing market and rising domestic inflation would push the central bank to lift interest rates late next year. The official cash rate would rise slowly to a peak of 4 per cent in mid-2015.