Liam Dann 's Opinion

Liam Dann is the business editor of the NZ Herald

Liam Dann: No sign yet of dollar budging

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The New Zealand dollar completely shrugged off a fall in dairy prices yesterday - that's worrying.

While the 6.7 per cent drop in New Zealand's most important commodity on Fonterra's auction overnight prompted a mini sell-off, the kiwi was soon back up above US83c. By 5pm yesterday it was trading at US82.89c, up from US82.82 at 5pm on Tuesday.

Should we be worried that the commodity spike of the past few months has peaked?

Not yet, says Fonterra - and most economists. Prices are still at historically high levels and would still be so even if dairy shed another 10 per cent or so.

But the fall in prices highlights the real concern for the local economy - that stubbornly high dollar.

The trouble is that with the kiwi trading above US82c we really need commodity prices to be at record highs too, or we've got problems.

Commodity prices and the floating dollar are supposed to provide the economy with a natural hedge. When prices are high the rest of the world has high confidence in our economy.

The dollar rises and that eats into export returns in local currency terms.

But the flipside is that when prices fall the dollar falls too - or at least it is supposed to. That makes our goods more competitive and increases the New Zealand dollar returns for goods traded in US currency (which is most of them).

Yesterday was worrying because the dollar didn't budge.

Asian markets had a good day boosting demand for higher-yielding assets - and that includes the New Zealand dollar, which is still seen as a good bet by overseas traders to appreciate further and which also offers foreign investors a relatively good local interest rate return.

For the past year we have been in a sweet spot with regard to export returns.

With the domestic economy stalled, Fonterra has been able to inject plenty of extra cash and other export products - logs, meat and wool - have also been at cyclical highs.

But if commodity markets head south and the dollar doesn't follow, it will be a cruel blow while we are still patiently waiting for the export-led recovery to feel like a recovery.

- NZ Herald

Liam Dann

Liam Dann is the business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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