Concerns about the US dollar losing its shine as the world’s reserve currency, and strong prices for New Zealand’s key commodities, have combined to drive the Kiwi dollar up by about 7.5% so far this year.
The greenback has been under pressure from what the market views as erratic US policymaking, rising trade barriers and signs of a slowing US economy.
Most other major currencies have gained in response, and the Kiwi now trades at just over US60c, up from US55.6c at the start of the year.
Christine Lagarde, president of the European Central Bank, said in an article for the Financial Times this week that times were changing in international markets.
“We are witnessing a profound shift in the global order: open markets and multilateral rules are fracturing and even the dominant role of the US dollar, the cornerstone of the system, is no longer certain,” Lagarde wrote.
The euro is the world’s second most-used currency, accounting for 20% of global foreign exchange reserves, compared with 58% for the US dollar.
Harbour Asset Management fixed income and currency strategist, Hamish Pepper, said the greenback was losing favour, but only at the margin.
“The set-up to this weakness in the US dollar was one where pretty much everybody acknowledged that it was an expensive, or overvalued, currency,” Pepper said.
“It’s been supported by this exceptional US economy, so that was the story.
“All of a sudden we’ve had a couple of things which have caused a move back towards fair value – so some dollar weakness.”
Pepper said the US dollar was reflecting a slowing US economy, with political uncertainty and barbs thrown by US President Donald Trump at US Federal Reserve chairman Jerome Powell making matters worse.
Powell is this week expected to keep US rates steady, which will doubtless irk the President.
In April, Trump took to social media to attack Powell for what he saw as his reluctance to cut rates, calling him “Mr Too Late” and “a major loser”.
Pepper said that kind of talk was going to do the US some harm.
“You’re going to get people questioning: could there be a threat to the central bank’s independence? Which is a major problem,” he said.
“People are perhaps less comfortable than they were in owning US dollars and US assets, but it is only at the margin.
“It’s not abandonment entirely, but it is a different view.”
The US dollar’s image may well have been tarnished, but America remains the world’s biggest capital market by a very long way.
Out of the world’s US$135 trillion ($145t) bond market, the US makes up about $50t worth, followed by China with US$20t.
Domestically, data out on Thursday are expected to show that New Zealand’s economy grew by 0.7% in the first quarter (Q1), but economists doubt that can be replicated in the current quarter.
“From an economic growth point of view, it looks like it will be okay in Q1, but the problem is that we’ve had data that’s telling us Q2 doesn’t look, very good at all,” Pepper said.
“The exception, of course, is the external sector, with dairy prices at all-time highs in terms of the payout, for the season and the forecast for next,” he said.
“So that’s probably part of what has given the currency some support, despite the fact that we’ve had a trade war, with tariffs being imposed.”
Last week, a government report said New Zealand primary export earnings will hit $59.9b in the June 2025 year – $3b higher than was projected in December.
The stronger export performance has helped the New Zealand dollar outperform its Canadian and Australian counterparts, both of which have gained by about 5% in the year to date.
Currency markets aside, analysts have raised concerns about rising long-dated US Treasuries and the impact that will have on funding costs for the already heavily indebted US Government.
Key 30-year US Treasury yields have been nearing 5% from 4.80% at the start of the year, while yields on shorter-dated bonds have eased.
“There’s been a steepening of the yield curve, which is reflecting those dynamics, and investors are losing confidence when it comes to funding the US,” Pepper said.
ANZ, in a market commentary, said there were signs the US economy was decelerating.
US data releases on demand and output for May were soft, with core retail sales falling and industrial production down.
“The data showed a decelerating economy amid higher tariffs, Federal spending cuts and elevated uncertainty,” the bank said.
The bank predicted that US domestic demand would slow this year.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.