Iconic New Zealand sports clothing brand Line 7's demise was partly due to the volatile dollar. Photo / Brett Phibbs

Iconic New Zealand sports clothing brand Line 7's demise was partly due to the volatile dollar. Photo / Brett Phibbs

The collapse of Line 7, which was at least partly due to the volatile New Zealand dollar, has put our currency back in the spotlight again.

Why is the kiwi so volatile, why is it so difficult to forecast and should the Government try to control it?

Currency markets are characterised by a lack of transparency and poor disclosure, particularly when compared with sharemarkets where price and volume statistics are freely available.

There are no disclosure requirements regarding currencies and the New Zealand dollar can be traded in Beijing, Warsaw or Santiago or through any electronic system.

There is no comprehensive information on daily trading volumes.

However, every three years the Bank of International Settlements, a Swiss-based organisation that serves as a bank for central banks, undertakes a major study of foreign exchange activity.

The results of the latest study, which was undertaken in April 2007, are shown in the accompanying table along with data from the 2004 and 2001 surveys.

The first point to note is the massive increase in daily turnover from US$776 billion in 1992 to US$1174 billion in 2001 and a phenomenal US$3081 billion in 2007.

Daily activity on currency markets was nearly seven times greater than the average daily turnover on all of the world's sharemarkets during 2007.

The huge increase in foreign exchange turnover has coincided with the deregulation of financial markets, electronic trading, financial innovation, the rise of emerging countries and widespread globalisation.

Currency markets are made up of three components; spot transactions, forward contracts and swaps. Spot transactions represented 51 per cent of total transactions in 1992 but as forward and swap markets developed spot transactions declined to 35 per cent in 2004 and 33 per cent in 2007.

The New Zealand dollar has been the high flyer in terms of turnover growth and is now ranked 11th in the world compared with 13th in 2004 and 16th in 2001.

The Kiwi's share of global turnover increased from 0.6 per cent in 2001 to 1.0 per cent in 2004 and 1.9 per cent in 2007 (the percentages and individual currency totals in the table add up to 200 per cent of the final total because each transaction involves two currencies).