The dollar is not coming to the rescue of struggling dairy farmers. It's coming to the rescue of retailers, motorists, gourmet food importers and dads who promised to take the kids to Disneyland.

But it is not coming to the rescue of farmers, exporters or the Reserve Bank and this is bad news for our economy, even if it makes us feel wealthier in the short term.

The kiwi was on the rise again last week. It flirted with US70c, its highest level in a year, after the US Federal Reserve spelled out a cautious path for US interest rate rises - now likely to be hiked just twice this year instead the anticipated four times. As you'd expect the US currency weakened in response and on Wall St stocks rose.

That prompted local banks like ASB to revise currency forecasts upwards. ASB now has the kiwi at US67c by the end of June, where it previously had it at US63c.


Relatively speaking New Zealand interest rates still look too good for global currency traders to ignore. If anything is going to take New Zealand into a dangerous bubble territory it is a high dollar and low commodity prices.

In the clever deregulated economic model we adopted in the 1980s these two things are meant to be mutually exclusive. Commodity prices are down and our dollar should follow, making our export goods cheaper relative to the international currencies they are traded in. Our exporters should be getting more competitive. But they are not.

Perhaps even worse, as consumers we should be getting the message that we can't afford to spend as much on imported goods. But we aren't because prices aren't rising.

Low inflation, an overvalued dollar and the wealth effect of soaring house prices are making us feel richer than we should.

The safety net that New Zealand's floating currency is supposed to provide is out of action, entangled in the mess of global deflation and monetary policy failure.

For the Reserve Bank this latest shift of the goal posts piles on the pressure for further rate cuts. One more cut this year has already been priced in by markets and won't now do much to shift the direction of the kiwi dollar. Bets are starting to weigh towards a second cut - taking the OCR to an unprecedented low of 1.75 per cent.

What makes the Federal Reserve's ultra cautious approach frustrating is that the US economic recovery seems to be tracking just fine. The recovery story appears to have been derailed by January's mystery Wall St slump and an ongoing obsession with risks in Europe and China.

Not that we should expect the Fed to cut us a break. But if it leaves US rates too low too long then it risks creating a bubble there too. Overly cautious monetary policy after the crash in the early 2000s did exactly that, fuelling the boom that busted so terribly in 2008 with the global financial crisis.

The trend is still downwards for the kiwi, it has to be because there is no other logical way to forecast it. But we are at the mercy of US sentiment and that seems increasingly detached from the fundamentals of its economic data.

Something has got to give. Eventually the Fed's mood will turn again. Eventually the commodity slump will ease. Perhaps eventually New Zealand will develop a more productive, more diverse economy that can really see us through this kind of global slump. Until then we'll just have to take our chances and hope that immigration, tourism and Government spending can get us through.

But the longer the kiwi rides high while export income falls the riskier that formula looks.