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NZ dollar vs US dollar -
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As a small, exporting country full of intrepid travellers, monitoring the exchange rate has almost become something of a national obsession.
That is of course exacerbated when the dollar soared to the levels we've seen of late. The higher the dollar goes and the longer it stays there, the louder the cries of pain from our crucial export sector about how over valued the dollar is.
But if you believe in the basic economic principles of supply and demand, how can we conclude that where the currency markets have determined the value of the dollar sits is wrong?
You will have heard the Prime Minister and others lament the fact that our exchange rate with the US dollar is more to do with US dollar weakness than New Zealand dollar strength. That may be the case, but it changes little - the reality of an exchange rate is that it is influenced by both currencies that are part of the equation.
Of course, the most desirable level for the dollar is completely subjective. Travellers and importers alike enjoy the benefits of the dollar at these levels. Exporters hedge, seek new markets and cut costs, investment, jobs - whatever it takes to keep their heads above water while they wait for foul winds to change in their favour.
Then for others, it's both good and bad. Take Air New Zealand, which reported a 45-percent drop in annual profit this week. A high dollar generally helps to offset rises in oil prices, but it also makes holidays in New Zealand not look quite so cheap anymore. The net benefit might be positive, but what sort of airline would cheer something that might deter people from flying here?
It's clear whatever the dollar does it will help some and hinder others so where exactly does the 'fair value' - a term often employed by economists to describe a rational unbiased level of the dollar- actually lie?
This week on AMP Business Kevin O'Sullivan from OM Financial gave us several options to calculate where that might be - like the Big Mac index or the Ipod Index - which put the over-valuation of the kiwi at 13-percent and 20-percent respectively. But basically concluded, they're flawed.
He says the dollar's value is no longer uniquely driven by the fundamentals of a country's trade, because it's been distorted by speculators. "The market is much bigger now, there's much more volume and much more volatility...now 90-percent of the market is speculation so fair value to a speculator doesn't really mean a hell of a lot".
So where would he put the 'fair value' of the kiwi dollar? "I wouldn't. I don't think there is such a thing as fair value for a currency. The currency is trading where it's trading...you need to look at where the currency is now, what your needs are and use the tools available"
In other words, get over it. "Fair value" as a concept means nothing in the currency markets.
One company I interviewed this week, yoghurt maker Easiyo, is a prime example of a company getting over it and getting on with it. They generate 75-percent of their revenue offshore, are facing higher costs because of soaring dairy prices and yet their sales are growing at an annual clip of 20-percent.
"It's been tough, but it's cyclical and if we can survive in this environment, imagine what it will be like when things get easier?"
Those easier times, however, could be some way off if Kevin O'Sullivan's predictions are on the money - he says expect the dollar to be above 80 and perhaps closer to 90 US cents for the remainder of the year.
To read more opinion by Nadine Chalmers-Ross click here.
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