Sam Stubbs: Inflation is the worry not dollar

Finance Minister Bill English. Photo / Mark Mitchell

The high kiwi dollar has served as a curse and a blessing to our economy.

For people wanting a holiday overseas, the purchasing power of our currency is great news.

Exporters producing goods and services outside of the agricultural sector are less delighted with the kiwi's strength as their products are now more expensive.

Whether exporters have hedged their currency exposure could make a big difference to their profits this year.

If they aren't placed correctly to offset a rise in our exchange rate, they could find themselves getting fewer kiwi dollars in return for their foreign sales.

The exception to all this is Australia. The Aussie dollar continues to defy gravity and looks expensive from most perspectives.

It has been the saving grace for many of our exporters but the Aussie is now looking overvalued and has begun to weaken against the kiwi.

History shows it's extremely unusual to have our dollar so weak against Australia's, but so strong versus the greenback.

Strength in the kiwi is not all bad news and there can be some serious winners. Imports are cheaper, which offsets inflation imported from other markets.

The best example of this is the cost of petrol.

As petrol is priced internationally in US dollars, rising prices abroad have been partially hedged by the increased buying power of the kiwi.

A strong kiwi means not only cheaper costs for households buying imported goods directly, but also for businesses that rely heavily on using imported materials, especially if they then re-export the finished product.

Despite its recent strength, we could be facing a turnaround in the fortunes of the kiwi.

Instead of complaining about rising exchange rates, we could be scrambling to deal with them falling.

One reason the kiwi has been so strong has been the Government's enormous borrowing campaign.

The Government borrows in our currency, so foreigners who wish to lend it money have to buy the kiwi to do so, pushing up the price.

Finance Minister Bill English has conceded the Government has been borrowing about $80 million to $100 million more each week than it actually needs at present.

It is over-borrowing to hoard funds in case of rainy-day events, such as international interest rates going up or a meltdown in the euro area if the likes of Greece or Ireland finally throw in the towel and default on their debts.

According to the Government, its weekly borrowing will drop from about $380 million to $100 million from next month, which should take some heat out of the kiwi.

If our currency falls much as a consequence, we will lose the pricing hedge effect and start importing more unwelcome foreign inflation into our domestic economy.

It is ultimately inflation we should be worried about and preparing for, not fluctuations in the price of our dollar.

Disclaimer: Sam Stubbs is CEO of KiwiSaver provider Tower Investments.

* sam.stubbs@tower.co.nz