August 20th, 2009
Rakon chairman Bryan Mogridge’s complaint last Friday about the volatility of the NZ dollar was not, on balance, particularly helpful to the wider currency debate. It was still a timely reminder to policy-makers countering the vagaries of currency fluctuation will not happen by developing back-of-the-envelope proposals. Mogridge accurately noted because the USD (in which many export transactions are denominated) is not flavour-of-the-month on world markets, the NZD often soars well above what should be its natural resting point, at a time when counter-intuitively the economy is in the doldrums.
Dollar Too Volatile. Mogridge says the enhanced volatility in the NZD over the past year (dropping from 80c to 50c and now 67c against the USD) makes it “doubly difficult” to make sound strategic decisions. “Overseas traders profit from playing with our currency and they do so partly because as a nation we borrow so much offshore for non export-producing assets, such as investment housing.” However, having made the case for action, Mogridge seems to be as flummoxed as anyone about how to remedy this. He is honest enough to admit he has no instant pudding answer. “I do know that what we are currently doing isn’t working.” The possible solutions are difficult to pinpoint because they are few and far between. The Reserve Bank has a limited range of blunt monetary tools at its disposal which leaves it looking a bit like a toothless tiger during economic crises.
Join The Euro? What about currency union? John Key has dampened speculation about the possibility of NZ and Aust sharing a common currency, safe in the knowledge there are higher priorities in concluding a Single Economic Market (SEM). Bill English has been predictably more muted in his support for the idea, preferring to see the benefits to NZ spelt out before he makes it unconditional. Even though the global economic crisis may have given such ideas more impetus, politically they are still difficult to sell on this side of the Tasman. NZ concerns about loss of sovereignty to Aust will take some assuaging. A more pragmatic long-term option might be to peg the NZ dollar to the euro, a currency which has held up remarkably well from assault by the recession. NZ and the EU started high-level talks last year about exploring ways to deepen the mutual economic and trade relationship. As these discussions proceed, we have nothing to lose by trying to progress such an idea.
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