Nations pay price for a high dollar

Signs of global recovery have fuelled the movement of money from the US to the New Zealand, Australian and Canadian dollars.

New Zealand farmers face at least a 12 per cent drop in milk prices as the kiwi rises at its fastest pace since 1985, according to Fonterra, the world's largest dairy exporter.

That explains why Reserve Bank Governor Alan Bollard last week called the exchange rate against the US dollar "unhelpful" and "a real risk to us" as the country endures its deepest recession in three decades.

Similar concerns are besetting Canada and Australia, two other commodity-rich economies.

All three countries' dollars are close to posting their strongest quarters against the greenback since at least 1971.

Traders see the currencies as undervalued because signs that the deepest global recession since World War II is ending are fuelling demand for raw materials.

The rallies are testing policy makers, hampering growth by sapping commodity earnings and putting exporters at a disadvantage.

"We don't really see any green shoots in our markets in New Zealand and the rest of the world," said John Walley, head of the New Zealand Manufacturers and Exporters Association in Christchurch.

"And the high exchange rate is strangling any that are poking their heads up."

Policy makers already have started trying to talk down their currencies, sparking speculation central banks may lower interest rates, print money or buy their own legal tender to curb the gains.

The Bank of Canada this month reiterated comments that the Canadian dollar's "unprecedentedly rapid rise" may "fully offset" economic gains.

Australian Treasury Secretary Ken Henry said: "If today's exchange rate were to continue, that would imply some downside risk."

New Zealand Finance Minister Bill English said last month his Government would prefer a weaker dollar.

"The markets should keep a look out for language that justifies intervention to cap New Zealand dollar strength," Ashley Davies, a currency strategist in Singapore at UBS AG, said last week.

The Reserve Bank of New Zealand started intervening in June 2007 after Bollard foreshadowed the move in April.

New Zealand's dollar is the biggest three-month spot-return performer against the US's legal tender after Australia's dollar and South Africa's rand.

As of Friday, when it closed at US64.31c, it had gained 15 per cent so far this quarter and 23.6 per cent since March 12. The best quarter since 1971, as far back as Bloomberg data go, was a 16.6 per cent gain in 1985's third quarter, just after New Zealand ended exchange-rate controls the previous March.