The day the kiwi was let loose

Friday: "It was actually getting a bit too easy. Everyone could work out where the currency was going just by making a couple of calls."

Monday: "It was a huge experience. It was just a huge learning curve and nobody knew what was going on."

That's former foreign exchange dealer Garry Wycherley reminiscing about the float of the New Zealand dollar 20 years ago.

He used to write a weekly column in the now-defunct Auckland Star about the dollar and also did daily radio reports.

On the Friday, with fewer than 10 key players in the currency market, all it took was a few phone calls in the morning to ask whether they were selling or buying that day.

Things changed dramatically three days later when the Fourth Labour Government floated the dollar on March 4, 1985.

It was not until March 3, 1985, that the major banks were called in and told of the next day's float. The Government had decided to float the dollar at 44.4USc - Friday's closing level - which freed it from its practice of setting the rate daily.

Then finance minister Roger Douglas said the decision was announced at 10am on March 2 - an hour after then prime minister David Lange finished his address at the Oxford Union debate

Lange argued - and won - against US moral majority representative Jerry Falwell on the pros and cons of the nuclear deterrence.

"I can smell the uranium on your breath," was Lange's now world-famous retort.

"We were sitting in my room [in Parliament] watching it and then, when it was over, we made the announcement," Douglas said.

Once the decision was taken, he said it was business as usual - he didn't watch the market open on the Monday morning as he was in a Cabinet meeting.

Anecdotal evidence suggests that then associate finance minister Roger Prebble greeted the decision with "Bugger it, the only way to find out is to do it".

The Herald clippings files describe the first day's trade as "orderly but thin. The dollar traded in a range of 44.75USc to 42.60USc ... "

Dealers reported some interest in the dollar, christened the kiwi, from overseas, mainly from Japan and Australia, the Herald wrote on March 5, 1985.

Behind the scenes it was a different story.

"There was a huge lack of experience, massive lack of it. There were a lot of people who knew very little about what was going on. And the smart boys in New York and around the world took advantage of that," Wycherley said, adding it was the Government's restrictive work-permit regulations that stopped experienced foreigners from stepping in to help and teach.

Instead, they remained in their overseas offices able to manipulate the local market and cream profits at the expense of the naive.

Although the dealers were on a steep learning curve, so were New Zealand companies.

Wycherley believes the local markets received their education at the expense of local businesses.

"The dealers said, 'We'll do this, we'll do that and see what happens'. And, at the end of the day, it was the clients that lost money, not the trader personally."

At the time, insider trading was not illegal and it was commonplace for traders to make some money for their bank on the back of deals they were doing for their clients.

""It wasn't just the currency - it was all of the New Zealand financial market. There were a huge amount of cowboy trades going on. People were making big wins with the Government inevitably being the loser."

The float followed the election of the Fourth Labour Government in July 1984.

The victory precipitated a huge run on the currency because Labour had made it clear it would devalue the currency.

The run coincided with a constitutional crisis when outgoing Prime Minister Robert Muldoon initially refused to allow Prime Minister-elect Lange to devalue.

Banks and speculators took a one-way bet to buy foreign exchange. Eventually, when foreign reserves were virtually exhausted and the Reserve Bank faced bankruptcy, Muldoon relented. The kiwi was devalued from 63USc to 49.6USc.

"[The float] was inevitable once they'd devalued because we were following Australia and they'd done the same thing," Wycherley said.

Before the float, New Zealand used a variety of exchange rate mechanisms, including a crawling peg between June 1979 and June 1982, and fixing the exchange rate against a basket of currencies between 1982 and 1985.

Under these arrangements, the Reserve Bank acted as a residual buyer or seller, trading foreign exchange in whatever quantities were necessary to support the exchange rate.

The amounts traded are much bigger now than 20 years ago. Then, a $200 million deal would dominate the market on the day and affect the value of the kiwi.

Now four times that amount is needed to move the rate.

The kiwi is now the 11th most traded currency in the world, with daily turnover in the New Zealand market of around $7.5 billion.

The dollar also moved a lot more on a daily basis than it does now. If the kiwi moves 1c in a day now, it's headline news.

Back in 1985, 2c or 3c shifts in an afternoon were not uncommon.

Since March 1985, the kiwi has gained almost 64 per cent against the US dollar, around 45 per cent against the Australian dollar and has fallen 8 per cent against the British pound.

One of Douglas' first acts was to free up foreign exchange controls.

But freeing exchange controls without floating the currency meant the Reserve Bank could not control monetary policy as domestic liquidity could be affected by the purchase or sale of New Zealand dollars.

Wycherley said: "They had to float it. They had no choice."

- additional reporting NZPA