Liam Dann: Lower kiwi dollar not all grim for economy

The New Zealand dollar dipped below US59c this week, its lowest level since the initial Covid panic in early 2020. Photo / Steven McNicholl

Talk about Sod's Law. Just as more of us begin to contemplate heading for overseas holidays, the New Zealand dollar has plunged.

The kiwi has dropped steadily from around US70c in March and dipped below US57c at the weekend - close to its lowest level since 2003.

The fall is not so much a symptom of New Zealand economic weakness, but of American dominance of currency markets.

Like most other currencies in the world right now, our dollar is bumping up against a surge in the value of the Greenback - which is rising as the US Federal Reserve hikes interest rates.

Even the once mighty British pound fell to record lows and threatens to hit parity with the US dollar - down as far as US$1.03.

For countries like New Zealand and the UK, the strong US dollar presents bigger problems than just the cost of a trip to New York or Disneyland.

It effectively puts the US at the front of the queue in the fight against inflation. A higher currency offsets the costs of their imports and eases the pressure on local consumers.

The rest of the world will have to work harder to get prices down.

But if we can look past the immediate pressures of the cost of living crisis - admittedly no easy trick for many Kiwis - a lower dollar isn't such a bad thing for our economy in the longer term.

New Zealand is an exporting nation and a low currency means our goods are more competitively priced in international markets.

It lifts New Zealand dollar returns for farmers and other exporters and provides a much-needed boost to our tourist sector - by making the country cheaper (especially to Americans).

That's the kind of economic fair winds that have economists increasingly tipping that the economy will stay buoyant for longer but that inflation will be with us longer and interest rates will need to rise higher than hoped.

Economists at ANZ and ASB have lifted their forecast peaks for the Official Cash Rate from 4 per cent to 4.75 and 4.25 respectively.

Market pricing now sees a peak of around 4.5 per cent and the implication is that the Reserve Bank will need to work harder to slow the economy and get on top of inflation.

The lower dollar might not help the inflation fight but it will help keep recession at bay and preserve jobs.

Eventually, the US dollar will fall. Currency analysts say - based on relative genuine economic strength - it is currently over-valued.

For now, the world will need to wait for the US Federal Reserve to call victory in the inflation fight, and time on its cycle of rate hikes.

Meanwhile, those bemoaning the lower international purchasing power of the kiwi dollar this year should look back at the long-term charts.

A sub-US60c kiwi might seem low by modern standards, but it is well north of the record low of US39c we touched in 2000.

In fact, if we look back across the kiwi dollar since it was floated in 1985, the long-run average value is just US63c - not far from where we are now.