Australia’s popularity with international investors could come back to bite it by artificially inflating the value of the Australian dollar.

Reserve Bank of Australia deputy governor Dr Philip Lowe is warning that the flow of money into Australia could keep the Aussie dollar higher than the state of the economy justifies.

“We could face the issue where the currency is high, purely for financial reasons and not because of the fundamentals of the underlying economy,” he told a forum in Sydney on Thursday.

However, Dr Lowe did not believe the currency was overvalued at present.

“When you have a very high terms of trade and a once-in-a-century investment boom you are going to have a high exchange rate,” he said.

“Where the currency is at the moment, it is hard to make a strong case that it is fundamentally overvalued.”

The Australian dollar has traded above parity with the US dollar for most of 2012 and 2011, putting pressure on Australian exporters.

Westpac chief currency strategist Robert Rennie said uncertainty about the state of the European and US economies meant investors were increasingly sending their money towards the relatively safer shores of Australia.

But there is a risk the demand for Australian assets could keep the dollar high even if the local economy slows.

In normal circumstances, signs of weakness in the economy would send the Australian dollar lower, making it easier for exporters to sell overseas.

If Australia’s economy slows but the currency remains high, it could exacerbate the pain felt by businesses.

Mr Rennie said Europe’s debt crisis had done long-term damage to its reputation and it was possible Asian investors would continue to favour Australian investments over European ones, even if the local economy slows.

“The impact it is having on the longer term investor out there is still being felt,” he said.

“It’s not just an economic argument, I think it goes further and deeper than that.”

He said Japanese households had doubled their investment in Australia in the past five years, at the expense of European assets.

Australian assets now made up 22 per cent of the investment portfolio held by Japanese households, up from 11 per cent in 2011.