John Carran: Learning to love the high dollar

On the flip-side of the coin, a high exchange rate reduces the New Zealand dollar cost of the imported materials used to produce our exports. Photo / Thinkstock

Opinion

Being in cool countries club not so bad, writes John Carran, senior economist at Gareth Morgan Investments.

The New Zealand dollar has risen rapidly since December last year. At the time of writing it was valued at just over US81c, which is up around 7.5 per cent from the middle of December.

The New Zealand-US exchange rate is close to its highest level since it was floated in March 1985.

Against the Australian dollar it hasn't been quite as strong - up around 1.4 per cent since mid-December. Among the world's most traded currencies, the New Zealand dollar has been the fastest riser over the past three months ahead of the Australian dollar and the Norwegian krona.

The trend for the New Zealand currency has been up since the early 2000s. New Zealand, with Australia, Canada and Brazil, is being viewed as part of a cool countries club - the main benefactors of global growth as demand for their commodity exports increase.

These countries' currencies have risen accordingly as investors seek to take advantage of their export successes in growing markets, especially China. New Zealand, in particular, is seen as producing what the world wants and needs - good quality farm-based food and materials.

The New Zealand dollar's rise is also partly a vote of confidence in the underlying stability of the economy. Our banking system is sound, government debt is low by developed country standards, and we have a stable economic and political environment (despite what might be perceived from insular political debates). Relative to the moribund economies of Europe, Japan, or even the US, New Zealand's prospects seem a lot rosier.

Should we be worried about a high New Zealand dollar? Well, our exports have generally been doing OK recently, despite a sluggish world economy.

This is largely because the prices for New Zealand's exports on world markets have been high. Indeed, high prices for our exports are partly why the exchange rate has been high.

Demand for kiwi dollars has risen as a result of higher sales of New Zealand goods and services overseas. This raises the price of the kiwi relative to other currencies - the New Zealand dollar exchange rate.

It is true that a high New Zealand dollar is particularly trying for exporters who do not currently receive high international prices for their goods and services. That is the tough reality of international trade.

The exchange rate is a price and, like most prices, it sends a signal to producers about what people value at a particular point in time.

At the moment, consumers in our main markets have collectively increased the value they attach to dairy, horticultural and meat products.

In a relative sense they don't value so much some of the non-food manufactured goods we produce or our tourism services.

This may change over time as producers of these goods and services modify their offerings to make them more attractive to overseas customers, as overseas preferences change, or as economic circumstances in overseas markets become more favourable.

On the flip-side of the coin, a high exchange rate reduces the New Zealand dollar cost of the imported materials used to produce our exports, such as oil and other fuels, metals and manufactured components.

For exporters who have significant imported inputs, a high exchange rate can help sustain profit margins in the face of possibly lower demand for their finished products overseas because of higher foreign currency prices.

Those exporters who do not get a significant reduction in their costs from a high New Zealand dollar may be forced to cut costs and become more efficient in their production processes.

A series of Treasury commissioned studies suggests that a high exchange rate may have been an important spur to productivity gains among manufacturing exporters in the late 1990s and early 2000s.

So a high dollar is not necessarily the burden to exporters that it is sometimes painted.

But what about its effect on the rest of the economy?

In general, a high dollar is likely to be positive if it is a consequence of market conditions that favour the New Zealand economy, particularly sustained growth in demand for our main exports and an economy that performs better than others.

A rise in the value of the New Zealand dollar is like a wage rise for every New Zealander receiving an income in this country because the price of imports goes down, which helps our incomes go further.

In addition, a high dollar makes New Zealand dollar savings more valuable compared to those in the rest of the world.

This means that we can do more with those savings.

We can put less aside to reach our savings goals, retire earlier, or buy more goods and services in our retirement years.

The exchange rate will continue to fluctuate between highs and lows as it is buffeted by global forces.

But, based on developments in world markets, the kiwi could remain high for long periods in the future.

Maybe it's time to stop worrying and learn to love the high dollar.

Any opinions expressed in this column are John's personal views and are not made on behalf of Gareth Morgan Investments.