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8
NOV 10

Currency excuses don't wash




The tired argument that we can do nothing about an overvalued currency has been well and truly worn out. Comments from the Reserve Bank and the Government that although the currency has bad impact on growth, this must simply be tolerated are hard to fathom when there are countries actively intervening in their currencies.

The recent coverage about ‘currency wars’ is in fact the position New Zealand has been in for a number of years. While other countries either pegged their currencies or ran loose monetary policy to keep them down, our tradeable sector bore the brunt of the capital inflows caused by New Zealand’s comparatively high interest rates. No action was taken then and there is still no desire for change now.

Reserve Bank Governor Alan Bollard commented at the Finance and Expenditure Select Committee that in terms of intervening in the foreign exchange market:
“The times we feel we can be effective are when we are around the peak or trough of the cycle and also when the exchange rate setting may be fundamentally driven by domestic policy distortions.”

With a dollar this volatile some more proactive policy is required.

This quote from Business and Economic Research Limited’s October Monthly Monitor sums up the situation:
“On the grounds that New Zealand is too small to move ‘the market’, our authorities have traditionally opposed intervention notwithstanding the fact that sterilised intervention is a long established concept in finance literature and widely implemented around the world. Of course, it can run into trouble when authorities are trying to maintain an over-valued exchange rate, without adequate foreign currency reserves with which to intervene. But when the intervention is to prevent over-valuation, the only limit is the supply of a central bank’s own currency. This is not a problem for a truly independent central bank that is not facing inflationary pressures. When countries as small as Mauritius are intervening to stabilise their exchange rate and are being complimented on it by the IMF, one wonders why the New Zealand authorities think it is beyond them.”

If the Government and its officials are serious about rebalancing the economy the currency must be the number one issue. The so called rebalancing we have seen so far has simply been imports declining at a faster rate than exports as consumers struggle to afford them. The latest merchandise trade statistics showed that exports had declined 2.5 percent since the September quarter last year. To turn these numbers around we need a new approach.
 


tags: currency wars, currency intervention, rebalancing
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