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Nadine Chalmers-Ross: Where to now for the kiwi?

opinion Nadine Chalmers-Ross

By Nadine Chalmers-Ross Business Presenter

Published: 10:48AM Friday April 27, 2012 Source: ONE News

They say that talk is cheap. And perhaps that's true, because everyone from the Prime Minister to the Reserve Bank Governor has been talking about the heights of the kiwi dollar, but it's done nothing to cheapen our currency.

While it's been higher than it is right now, according to research firm Infometrics on a trade-weighted basis it did, in the first three months of this year, reach its highest quarterly average since 1984.

What's more, because our currency is known as a 'commodity currency' as commodities like dairy are a major source of our income, the dollar tends to follow the rise and fall of the commodity cycle. The problem is prices have been coming down, but the dollar has been stubbornly going up - up 7.8% in the first quarter.

The Prime Minister was quoted recently, while on his trip to Indonesia, saying that the kiwi dollar is overvalued - nothing new there. But he also said "we're considering what we can do to resist a rising exchange rate".

He didn't say what they are considering. But if his subsequent comments that the idea intervention can bring the dollar down is "lala land stuff" are anything to go by - we know what he won't be considering.

The Reserve Bank governor Alan Bollard has been registering his concern about the dollar for a long time now.

Six weeks ago he mentioned it lessened the need for interest rate cuts because it helps keep inflation in check, which is of course his main task. That doesn't mean it's a good thing for our economy - it's not. It just means it's doing some of his work for him.

This week, he went a step further, saying "Should the exchange rate remain strong without anything else changing, the bank would need to reassess the outlook for monetary policy settings".

What does that mean? That depends who you ask.

Westpac economists believe it means further cuts to our already record-low Official Cash Rate of 2.5% can't be dismissed and it even raises the possibility the Reserve Bank might employ the intervention John Key, a former currency trader, has dismissed.

ANZ economists meanwhile believe Bollard's comments are "sabre rattling" rather than a serious intention. "We believe that cutting the OCR purely on the basis of a high New Zealand dollar would be a mistake".

Given this week the US central bank, the Federal Reserve, this week reiterated it's likely to keep their rates near zero until the latter part of 2014, perhaps they have a point. Even if our rates were lower, they'd be still be high compared to those in the United States, United Kingdom, European Union and Japan.

If Bollard was simply planning to talk the dollar down, as usual, it failed.

It's clear talking, or in economists' parlance 'jawboning' doesn't work. But short of printing money I wonder, what will?

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