KEY POINTS:
Exporters can be cautiously heartened by a dramatic tumble in the New Zealand dollar over the past three days.
It was a roller coaster week for the Kiwi, which reached a quarter-century high on Wednesday of US81.6c, only to topple five cents to US76.45c by yesterday morning. Late yesterday the currency was sitting at around US77c.
Experts predict the dollar will stabilise in the 70s, or may even pick up again in the short term. But the forces driving the tumble could also be setting the scene for a more sustained downturn - sweet tidings for exporters struggling to remain competitive.
ASB chief economist Nick Tuffley identified two key drivers behind the fall. One was signals from the Reserve Bank that Thursday's official cash rate increase, which triggered interest rate rises, may be the last for some time. This makes the New Zealand dollar less attractive for currency speculators, who generally want to put their money into markets where rates are rising, not where they are flat.
The other was a sudden nervousness in world equity markets, fuelled by fretting about finance company collapses in the United States linked to mortgage defaults. Investors have been pulling out of riskier investments and the Kiwi is at the riskier end of the scale.
"People have been ducking for cover," Tuffley said. "When markets get quite shy about risk, you get these sharp movements."
However, he said, after the market had "pause for thought", investors might warm to the Kiwi again, as happened after a steep drop in February. "You can't rule out a short-term recovery."
Tuffley believed a sustained downturn would depend on the Reserve Bank holding the interest rates steady.
A Wellington dealer said the drop was a "healthy correction", and he expected the Kiwi to soon stabilise around the current level.
"It's not far away. The problem is in the United States, not here."
Bob Walters of Export New Zealand said a Kiwi dollar valued "in the 70s is pretty unlivable for long. It's the speculative level, not the level at which businesses can trade.
"It's great to see [the exchange rate] is dropping; we hope like hell it doesn't rebound."
Many exporters have watched their profit margins being squeezed over past years because of the high exchange rates.
Two major exceptions were dairy exporters, which were enjoying all-time-high commodity prices, and IT firms, which were cushioned by high profit margins. Exporters have also been able to buy cheaper machinery from overseas.
Figures out last week suggest how deep the exchange rates are cutting. Last month's trade deficit of $524 million - the shortfall between the value of the country's exports and imports - was the biggest for June (however imports were boosted by the purchase of the HMNZS Canterbury). The average deficit for June months over the last decade was $155 million.
