Finance Minister causes kiwi flutter

By BRIAN FALLOW

Puzzlement has greeted comments by Finance Minister Michael Cullen yesterday that the Government is "not without options" to combat the strong New Zealand dollar.

"But those options have to be dealt with very carefully indeed," he told Parliament's finance and expenditure select committee.

He declined to elaborate, saying he would comment further "if or when I've done something".

Westpac's currency strategist, Jonathan Bayley, and National's deputy finance spokesman, John Key, a former global head of forex for Merrill Lynch, felt the only options available were unlikely or unwise.

Direct intervention in the foreign exchange market is an option - under the Reserve Bank Act. The Treasurer can direct the Reserve Bank to step in.

Key said it had been tried only once since the dollar floated. The bank spent about $200 million in an ineffectual attempt to slow the kiwi's rise as it approached 72USc in the early 90s.

Bayley said: "Given the perils of intervening against the trend - assuming the New Zealand-US rate is where the concern lies - and against a speculative market which loves a challenge, direct intervention seems unlikely."

Key said Cullen was quite correct that the New Zealand dollar's rise was predominantly driven by the US dollar's weakness on the back of its massive fiscal and current account deficits. But these were not forces New Zealand could resist. "It would be a train wreck."

Another option would be to overturn the monetary policy framework in favour of a regime to target the exchange rate instead of inflation, which would require a change to the Reserve Bank Act.

But Cullen expressed doubts - shared by the bank and former governor Don Brash - that adjusting interest rates has any reliable effect on the exchange rate.

Another option still, Bayley said, was Asian-style capital controls. But they would not be a good look.

"More likely, Cullen, to the extent he expected his comments to get airtime, is simply trying to jawbone the New Zealand dollar lower."

Key said it was irresponsible to suggest changes to what has traditionally been considered a sacrosanct area of policy - a freely floating exchange rate - and not be prepared to give more details.

"I think he's bluffing. I don't think he has got anything in the toolbox that would fix this quickly and he is doing a great disservice suggesting he does. It unsettles people."