THE Reserve Bank has acknowledged in its strongest comments to date that the stubbornly high Australian dollar may be inflicting more pain than it expected, with the currency posing ''important risks'' to the economy.
Facing pressure to intervene on the currency markets, the central bank said the global rush to safe haven assets had inflated the currency, causing it to buck long-running trends.
It also said the wave of resources investment was likely to peak earlier than expected, as companies became more cautious about the global economy's health.
Despite weaker growth in China and falling commodity prices - which normally drag on the currency - the Australian dollar has risen by US10¢ since June. This week it hit a four-month high above US106¢.
In comments seen by economists as an attempt to talk down the currency, the Reserve Bank yesterday noted that the rise had occurred ''despite the deterioration in the global outlook, fragile global financial sentiment, and declines in key commodity prices''.
It added: ''In the domestic economy, important risks revolve around exchange rate developments.
''The exchange rate has been high for some time; indeed, this is a key part of the significant structural adjustment process the economy is going through,'' the bank said in its Statement on Monetary Policy.
''However, it is possible that the
persistently high level of the exchange rate may be more contractionary for the economy than historical relationships suggest.''
The comments come as unions, manufacturers and some economists call for the Reserve Bank to step into global currency markets and relieve some of the pressure.
Much of Tuesday's RBA board meeting was spent discussing the dollar. In the end, members decided to release increasingly tough statements on the currency rather than intervening - so-called ''open mouth'' operations.
Since its float three decades ago, the dollar has acted as a ''shock absorber'', shielding exporters from weaker global demand by falling in times of weakness.
However, the relationship has broken down as investors seek safe places to park their money, a trend acknowledged by the Reserve.
''Ongoing strong foreign demand for Commonwealth government securities is likely to have been a supportive factor [for the dollar's rise],'' it said.
Former RBA board member Warwick McKibbin and Morgan Stanley strategist Gerard Minack have both backed intervention to prop up the dollar, but other economists say this is not needed until the situation becomes more extreme.
Despite the heightened concern about the dollar, the Reserve Bank's statement was broadly positive on the economy, with forecasts for domestic growth for 2012 of 3.5 per cent.
By the end of this financial year, it forecast inflation would reach the top of its 2 to 3 per cent comfort zone, up from 1.9 per cent today.
The carbon tax would be one reason for the rise in prices, it said, alongside a fading in the impact of the high dollar.
''The carbon price effect on inflation will largely have passed by late 2013 and underlying inflation is forecast to be around the middle of the target range thereafter,'' the central bank said.
Economists viewed its commentary on resources as more subdued, with the RBA predicting investment would peak ''somewhat earlier than previously thought'' during 2013-14. However, it said the outlook for mining investment was still ''strong'' and export prices were high by historical standards.