Editorial: High exchange rate is cause for celebration

Opinion

A floating exchange rate is like a window to the world. Through it we can see where we are in relation to other economies and how others are seeing us.

Right now, they are regarding us more confidently than we feel. The dollar has hit a post-float high against the world's most widely traded currency, the US dollar.

The reasons may be as various as those suggested. Export prices are high, import consumption is low, April produced a record trade surplus.

The long-term outlook for dairy and meat consumption in developing economies such as China makes this country an enticing investment. China is said to be poised to invest heavily in New Zealand.

Or it may just be, as the Prime Minister believes, that the US dollar is down, reflecting lingering problems in its economy.

But others point out that the kiwi has gained strength in recent weeks against the Australian dollar too. The Reserve Bank's index of the dollar's movement against all our main trading currencies is at a three-year high.

How can this be, when the domestic economy feels flat and uncertain? Two destructive earthquakes in Christchurch have rocked the whole economy, leaving business everywhere uncertain of its impact on the recovery.

Eventually the damage the earthquakes have done to an already weak recovery will turn into an injection of billions of dollars from international insurance payouts and state-funded infrastructure repair. But the turning point is not expected until this time next year, assuming no more aftershocks like that of February 22.

Ask an accountant how business is doing these days and the answer will be difficult. People are not spending, or are spending carefully and seeking bargains. Prices are static, or discounted. Competition is tough. Higher costs, such as fuel, cannot be passed on. Profits are down, companies are retrenching rather than investing and expanding employment or paying higher wages.

A high exchange rate should be a ray of sunshine for the domestic economy because it promises lower prices for oil and other imported supplies if the dollar is still high when existing stocks or hedged contracts run out.

Importers and exporters both hedge themselves against currency fluctuations, which means petrol companies might not yet be getting the full benefits of the exchange rate and farm co-operatives might not yet face the full costs.

The Prime Minister sounds less than happy at the heights the dollar has hit because it does not help to make a necessary economic change.

A low exchange rate boosts export returns in New Zealand dollars and makes imports more expensive, which should entice investors to switch from consumer products to export industries.

But the dollar went very low for the first two years of the previous Labour Government, when it was accompanied by a cyclical high in commodity prices.

Yet that combination did not produce a lasting switch in national investment. The wealth earned went mainly into property again, and consumption was encouraged by rising house values.

This time, the upturn in commodity prices has no help from a low dollar and there is nothing the Government or Reserve Bank should do about it.

Bank intervention, suggested by some, is effective only to cushion passing attacks on the currency. This is not one, it has been a sustained rise over several weeks.

It reflects an international view of the value of this economy and its likely performance. We should celebrate it. Rich countries do not have low exchange rates. It is doubtful countries become rich on a low rate. They produce products that can trade well in anybody's money. That is the goal.