Reserve Bank calls dollar overvalued The Reserve Bank believed the Australian dollar was overvalued by as much as 12 per cent last year, according to Freedom of Information documents released today. The papers show the central bank believed the currency was higher than it ought to be given the recent decline in our terms of trade and the deterioration in global economic conditions. Since then RBA officials have repeatedly and publically remarked upon the strength of the dollar. On Tuesday, RBA assistant governor Guy Debelle said the Australian dollar was "somewhat high" and raised the prospect of cutting interest rates to push down the dollar if conditions demanded it. Governor Glenn Stevens said last week the currency was ""somewhat too high"" considering declines in prices for the nation's commodity exports, while adding he would need to be confident it was ""seriously overvalued"" before considering intervention to weaken the exchange rate. ""The RBA is on the edge of a policy dilemma with respect to the currency,"" said UBS rates strategist Matthew Johnson. ""Substantial further strength, say a move above $US1.10, would require further rate cuts, but there is a limit to how far one ought to push such a policy, as it may create financial stability issues a little further down the track."" The RBA documents were prepared after July 1, 2012, amid widespread reports that demand by foreign central banks for Australian dollars had been contributing to the currency's overvaluation. At the time, the dollar was trading around $US1.025, having recently declined from an all-time high of $US1.10 in August 2011. Answers in the documents relate to questions about the impact of that foreign central bank demand for Australian dollars, including whether the RBA had examined the possibility of acting to curb appreciation of the currency. The documents show the Bank believes that the currency is "probably 5 per cent overvalued," but, depending on which model they use, that it could be much higher. "Most models that we tend to focus on suggest the Australian dollar could be 4-15 per cent overvalued," the document says. "[But] the staffs" preferred model ... suggests the exchange rate is around 5 per cent overvalued," the documents say. However, given the uncertainty of economic estimates, the RBA says its preferred model also suggests that the currency could also be undervalued. "It could be reasonably assessed ... as being anywhere between 4 per cent undervalued and 12 per cent overvalued," the document says. The documents also showed the dollar is held by as many as 34 central banks from Reykjavik to Santiago. The central banks of Slovakia and Slovenia were recent additions to a list of 16 economies that publicly hold the Australian currency, according to the papers. Newcomers on a list of 18 possible holders included China, France, India, South Korea, Thailand and South Africa. The Australian dollar today jumped half a cent to $US1.028 after the release of official capital expenditure figures which showed the investment expectations of Australian businesses for the coming financial year were a little higher than the RBA and the market had forecast. The documents also show 16 central banks around the world hold the Australian dollar.