For centuries, great minds pondered why diamonds, which were mostly useless, commanded such a high price while water, the key to life, had almost no market value. The problem became known as the paradox of value.

Today we understand the answer through a simple demand-and-supply graph. A country's currency, if traded, is subject to the same market forces. But some people believe that a national currency has a "fair value" and that government policy should be focused on achieving this.

They are wrong.

John Walley, of the New Zealand Manufacturers and Exporters Association, and commentator Neville Bennett have been been calling for measures to drive the kiwi dollar down to this magical fair value.

Walley's primary concern is quite rightly his members' businesses that export non-commodity products.

They face two problems: high-currency volatility, which makes planning and investing difficult, and the current high value of the dollar, which makes their goods uncompetitive.

A Treasury paper issued in March, however, found no empirical evidence that currency volatility did significant harm to exporters. Hedging is a cheap and effective measure to deal with short-term fluctuations.

It is prolonged high exchange rates that have been shown to harm exporters.

Statistics New Zealand records that merchandise exports rose 17 per cent in the 12 months to April to a high of $4.7 billion, despite a rising dollar and continuing volatility.

But we are primarily a commodity exporter, of milk and wood mostly, and many dairy farmers are doing well in spite of the inflated kiwi.

Indeed, world demand for their product is a driver of the currency, as is overseas demand for New Zealand's expanding government debt and the interest-rate policy of our Reserve Bank.

A criticism of the floating-currency regime is that most transactions are made by speculators. This is true but their trades do not materially affect the long-term value of the dollar. Only underlying fundamentals can have a lasting effect.

Walley will argue that the high value of our exchange rate hurts his members, and he's right, but it doesn't matter. The current price of the kiwi reflects the views of the market.

Moves to lower the exchange rate would be a form of protection that would mean we all pay more every time we buy petrol, travel or buy a Britney Spears CD.

It would be cheaper to pay cash to struggling exporters than manipulate the currency.

It would be better still for firms that cannot compete to adjust or die.

New Zealand once protected its manufacturing industry, which sheltered a small number of jobs at great cost to the wider economy. When they were removed, people and capital gravitated to new industries.

The value of the currency is a price signal and long-term shifts will force a reallocation of resources. This will hurt some firms and help others. There is no cause for the Government to intervene.

damien@waterstone.co.nz