NZ dollar shines against faded glory of US greenback

The New Zealand dollar has gone from strength to strength over the last few months, thanks in no small part to booming commodities prices.

In the bigger picture, its new-found clout is a reflection of the weak US dollar, which the World Bank says will lose its spot as the world's number one currency by 2025 or earlier.

The greenback has taken a hiding as America struggles to emerge from the quagmire of the global financial crisis.

The US Federal Reserve has used quantitative easing - the economic equivalent of a heart defibrillator - twice to get the economy going again but has so far has failed to raise a pulse.

Now there is talk that a third round may be necessary to nurse the world's biggest economy back to health.

Quantitative easing - sometimes described as printing money - involves the central bank buying government bonds and other financial assets in order to increase the money supply and the excess reserves of the banking system. It has led to very low interest rates and a very weak US dollar.

This in turn has made a lot of other currencies - particularly the commodities-based currencies such as the Australian, Canadian and New Zealand dollars, look good.

And while the US dollar has been in its sick bed, China's renminbi (RMB) has been doing press-ups.

Growth of the RMB as a trading currency has been accelerating over the past few years. A recent HSBC bank survey said RMB was set to overtake the sterling to become one of the top three trade settlement currencies this year.

The World Bank, in a report released last month, said six major emerging economies - Brazil, China, India, Indonesia, South Korea, and Russia - will account for more than half of all global growth by 2025.

As economic power shifts, these successful economies will help drive growth in lower income countries through cross-border commercial and financial transactions, it says.

The report projects that as a group, emerging economies will grow on average by 4.7 per cent a year between 2011 and 2025. Advanced economies, meanwhile, are forecast to grow by 2.3 per cent over the same period, yet will remain prominent in the global economy, with the euro area, Japan, the United Kingdom, and the United States all playing a core role in fuelling global growth.

Mansoor Dailami, lead author of the report, said the most likely global currency scenario in 2025 would be a multi-currency one centred around the dollar, the euro and the renminbi.

But to borrow from the old joke, rumours of the US dollar's death have been greatly exaggerated.

The US economy is still by far the world's biggest and, as a reserve currency, the US dollar remains the only game in town. Central banks, particularly China's, have been diversifying out of US treasuries for some time, but the vast majority of the world's currency reserves reside in this market and this is likely to remain the case for many years to come.

"We know that there is a move to diversify into the growth currencies such as the Australian dollar, the Canadian dollar and the New Zealand dollar," Westpac currency strategist Imre Speizer said.

"But relative to China's total holdings it is tiny," he said. "The bulk of it is still held in US treasuries, simply because there is no other market in the world that can take the size of the world's combined central bank reserves."

So where does that leave the kiwi? After hitting a post-1985 float high of US82.6c on Tuesday, currency strategists say there is potential for the New Zealand dollar to appreciate further.

World Bank view

* By 2025, six major emerging economies - Brazil, China, India, Indonesia, South Korea and Russia - will account for more than half of all global growth, and the international monetary system will no longer be dominated by the US dollar.

* As economic power shifts, these successful economies will help drive growth in lower income countries through cross-border commercial and financial transactions.

* Today's emerging economies will grow, on average, by 4.7 per cent a year between 2011 and 2025, and their share of global GDP will expand from 36 per cent to 45 per cent.

* Advanced economies are forecast to grow by 2.3 per cent over the same period but still remain a powerful force.