Is a strong dollar good or bad for the economy?

If it is true, as US news organisations have reported, President Donald Trump rang his national security adviser, retired Lt Gen Mike Flynn, at 3am last week to ask him this question. Should we be laughing or crying?

Initially it seems a ridiculously simplistic thing for a US President - and a billionaire businessman - to need to ask.

But if you take one step back it is not such a simple question. Economics questions never are.

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It probably depends on which part of the economy you prefer to stimulate.

A nation's currency typically rises on the strength of its economy. Investors buy in for the higher interest rates that strong economies tend to have and because of the security and stability that those wealthier places have.

That's what's held the kiwi dollar at historically high levels since the global financial crisis.

In relative terms we've been a better bet for currency traders than most of our peers.

But, as an export and tourism based economy, the high dollar has caused some serious headwinds for New Zealand.

With trillions traded on currency markets every day, New Zealand's dollar is just a cork on the ocean.
With trillions traded on currency markets every day, New Zealand's dollar is just a cork on the ocean.

We've become more expensive to visit and our commodity goods - such as milk powder logs and meat - are traded in US currency.

So, unless we raise our prices, the amount of New Zealand dollars our exporters earn is less than it would have been if the currency is low.

A low currency is helpful for our farmers, export manufactures and tourism operators.

If the value of the dollar fell sharply it would turbo charge our economy.

Consumers however would find themselves poorer - paying more for imported TVs, iPhones and for overseas holidays.

So, a big problem with Trump's question - apart from it being directed at a retired General rather than a retired Federal Reserve Chair or Treasury official - is that it is couched in such absolute terms that it is meaningless.

That kind of binary, absolutism does seem to be Trump's trademark.

If the value of the dollar fell sharply it would turbo charge our economy. Consumers however would find themselves poorer - paying more for imported TVs, iPhones and for overseas holidays.

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But a better question would be: Would a stronger or weaker dollar be better for our economy right now?

Even then the question has no absolutely correct answer because it becomes political when you consider which sector of the economy needs most assistance and weigh competing national goals.

As with most things in life the trick is to find a good balance and to try and shift that balance as other external factors change the formula.

It's not easy to do that with an open economy and a floating currency - as our Reserve Bank can tell you.

With trillions traded on currency markets every day, New Zealand's dollar is just a cork on the ocean.

But bigger nations have more clout.

China, in particular, pegs its currency at a fixed rate and has been accused by the US of keeping it artificially low to aid its exporters.

It does all start to get pretty complex. But that is hardly reassuring in respect of Trump's question. The trouble is that if you take a second step back then it is disturbing that the President is so racked with self doubt about his economic policy at this stage.

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That criticism does ring a bit hollow when you consider how much money the US Federal Reserve has printed since the GFC and how low it has pushed interest rates - both moves that have suppressed the US currency.

It does all start to get pretty complex. But that is hardly reassuring in respect of Trump's question.

The trouble is that if you take a second step back then it is disturbing that the President is so racked with self doubt about his economic policy at this stage.

He and his advisers should already be well aware of all these complexities. Trump has openly talked about starting a trade war with China over its currency policy.

His dilemma is that he wants a strong US economy with a strong currency bolstering its wealth and its buying power in the world.

But he also wants to stimulate the domestic economy and bring back manufacturing and jobs to the rust belt - a higher dollar will hurt those looking to export outside the US.

It's a tough equation but it's one all world leaders face.

That Donald Trump might be so unsure and insecure about the finer points of economic policy of the job is worrying indeed when you consider the global trade implications and New Zealand's vulnerability to those.

Although at this point, nothing is surprising.