Mallard wants NZ dollar to go even higher

Trevor Mallard

Economic Development Minister Trevor Mallard wants to see a higher kiwi dollar - in the medium to long term at least.

Anyone building their business planning around an exchange rate of "50-odd cents" against the US dollar needed to seriously rethink their strategy, he warned yesterday.

"Much has been said about the need for our dollar to ease off, to help our exporters," he said. "It's worth reminding ourselves of the giddy heights the kiwi has reached over the decades." Before the oil crises of the 1970s, it was more than US$1.50.

"Although this sort of level would be extreme in today's context, a strong kiwi has always gone hand in hand with a strong economy."

New Zealanders were never going to enjoy the higher standard of living they aspired to off the back of a low kiwi dollar, Mallard said.

"In fact, I hope and expect that in the medium to long term the dollar will be higher than it is now."

The kiwi was trading around 67.4USc yesterday. It has been above that level for most of the past 18 months, and was also higher for a similar period in 1996 and 1997 and for a couple of months in 1988. But, for most of the 20 years since it floated, it has been lower and its trend or average value has been around 57USc.

ANZ National Bank chief economist John McDermott expects it to continue to cycle around a similar or slightly higher trend over the next 10 years - the 58USc to 60USc level.

"If you are planning around 58USc over a 10-year horizon, that is probably a reasonable plan," he said.

"There is no particular reason to expect our currency to have a trend appreciation against the US dollar. The only way you would get that would be for New Zealand to have higher productivity growth rates than the US - which seems unlikely - or for the US to have higher inflation than New Zealand."

That seemed unlikely too, McDermott said, especially with a new Federal Reserve chairman, Ben Bernanke, who is an expert in inflation targeting.

Business New Zealand chief executive Phil O'Reilly preferred to see Mallard's comments as an aspiration.

"I agree with him that it would be good if New Zealand exporters were much more price-makers than price-takers and we were capable of sustaining over the long term much higher cross rates against the US, Australia and our other trading partners."

But to outperform the US in productivity growth was a big ask. "If the Government is serious about that there is a bunch of things they need to be doing in infrastructure, skills, tax, free trade and so on. And there's a lot business needs to do as well, of course - in capital investment, for example."

In the meantime, exporting manufacturers were at least as concerned about the volatility of the exchange rate as its height against the US dollar, O'Reilly said.

In that context it was unfortunate that the growth in Government spending was contributing to inflation and, therefore, high interest rates and a high exchange rate.

Auckland Chamber of Commerce chief executive Michael Barnett said he agreed with the Minister that starting a business that needed an exchange rate under 60USc to be viable invited unfortunate consequences.

A higher exchange rate was fine as a long-term goal but, in the short to medium term, exporters and import-competitive firms needed some relief on the currency front.

McDermott said the fact that the kiwi dollar had once been worth significantly more than the US dollar was irrelevant. Its decline since then mainly reflected the fact that the US had been quicker than New Zealand to get control of inflation in the 1980s.

He said the real exchange rate, adjusted for relative inflation in the two countries, remained broadly constant, otherwise exporters would become uncompetitive.

But firms needed to allow for a continuation of big cyclical swings in the nominal exchange rate.