By BRIAN FALLOW
The Reserve Bank's change of policy on currency market intervention looks more like a political sop than a change of heart about its usefulness.
Announcing that the bank was asking the Government for the capacity to intervene in the market to influence the exchange rate, Governor Alan Bollard seemed tentative, diffident and at pains to emphasise the limitations of intervention.
The bank would not try to permanently change the long-run exchange rate. The exchange rate cycle could not be eliminated.
"At best, we can influence the exchange rate only by small amounts at the extremes of its cycle."
Intervention involved risk to the bank - financial and to its reputation - and would require "very careful management".
He was particularly careful to give nothing away on what levels might trigger intervention.
But asked if he could think of a time in recent years when intervention may have been necessary, he said: "No. We haven't taken the view that that would have been necessary, looking back in the past."
That would suggest that the levels which would trigger bank action are above 71USc or below 38USc.
But another comment suggested the bank might focus on the trade-weighted index rather than any single exchange rate.
Bollard cited the Reserve Bank of Australia's approach as the model to be followed.
That was misleading, said Sydney Citibank economist Annette Beacher.
"The RBA does not actively target a level for the Australian dollar - otherwise why would it have experienced such extreme swings in recent years? - but merely smooths dramatic 'irrational' pricing that may take place from time to time."
The aim is not to reverse the market's direction but to slow it and smooth out the wobbles.
The Australian currency has had almost as much of a rollercoaster ride as its kiwi counterpart in recent years.
Westpac chief economist Brendan O'Donovan said that against the US dollar, the aussie had dropped 28 per cent from a peak in February 1989 to a trough in October 1993, risen 27 per cent to the next peak in December 1996, then dropped 41 per cent to a low in April 2001 before climbing 66 per cent to its most recent high last month.
The kiwi dropped 30 per cent from a peak in June 1988 to a trough in January 1993, rose 41 per cent by November 1996, plunged 45 per cent to a low in November 2000 and soared 81 per cent to its high last month.
The Bank of New Zealand's head of market economics, Stephen Toplis, regards the timing of Bollard's comments as political.
The Treasury is to report on currency intervention soon, and Finance Minister Michael Cullen's public comments suggest it will say some form of intervention is appropriate.
"So the Reserve Bank had to either front-foot the debate or look like it was defending itself," Toplis said.
"I don't think the Reserve Bank has changed its views on the efficacy of intervention.
"It's playing the game. It's saying, 'We have listened to your concerns. We're getting the mechanism to intervene but it's not necessary at this stage'."
Its ability to intervene when the currency is weak is limited by the fact that its foreign exchange reserves, at levels set in 1988, are worth only around $3.5 billion at current exchange rates.
It wants that increased but will not say by how much.
O'Donovan said average daily turnover in the kiwi dollar, excluding swaps, was around US$1.5 billion.
National's associate finance spokesman, John Key, said that while there might be a benefit in a veiled threat of intervention, the risk was that it would attract hedge funds and other speculators with far deeper pockets than the bank, looking to take it on.
Bollard's each-way bet
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