Bollard's big stick not enough to pull back kiwi

Reserve Bank Governor Alan Bollard took his best shot at knocking some stuffing out of the dollar on Thursday, but two days later the plucky kiwi is still higher than a hippie celebrating the 40th anniversary of Woodstock.

Not that anyone will be surprised by that - least of all the governor.

The Reserve Bank has never had the firepower for any serious influence over the currency.

Even in 2007 when the bank intervened directly in the market by selling kiwi dollars the effect was minimal and short-lived.

Thursday's message, that the bank retains a bias towards further easing of rates, was part of a long strategic game that Bollard now has little choice but to play.

If he sticks to his guns and holds rates low then perhaps the investors who are pushing the kiwi higher may start to find other economies offering comparatively better rates of return - at least relative to the risk involved.

And Bollard's message is most definitely that the New Zealand economy is still fraught with downside risk.

But as Australia moves its bias towards lifting rates we might start to see the kiwi decouple further from the aussie currency. That would be great news for the many manufacturing exporters that trade with our nearest neighbour.

Against the US dollar - in which most of the big ticket commodities like dairy are still traded - much bigger problems remain.

Many pundits are picking the greenback to fall further in coming months. If that happens Bollard's sway will be further weakened.

Our dollar would head up towards US70c, our exporters would earn even less in local currency, consumers would get even better deals on big-screen TVs and our current account deficit would resume its elephantine expansion.

In the old days running an outrageous, unsustainable deficit was a good way to warn currency traders that something was up.

But in the post-Lehman Brothers world the fact that New Zealand continues to earn less than it spends doesn't seem to bother anyone. At least there are plenty of bigger basket cases than us.

That's a point that Westpac economists made this week when they argued that maybe the dollar isn't overvalued at all.

After all, the overseas traders are stacking us up against every currency in the world. If they think we are worth US66c, then maybe we are.

Westpac also pointed out that the trade weighted index - a composite of our main trading partner currencies - isn't too far above a long term average. Both are fair points.

But you have to come back to the basics of what we earn and what we spend. As long as the dollar is above US60c we are doing too much spending and not enough earning.

If we can't bring the dollar down, we may need to address some more fundamental problems with our economy.