KEY POINTS:
The carnage in New Zealand financial markets of the last few days paused this morning as the New Zealand dollar recouped some losses and the sharemarket moved into the positive.
After hitting the lowest point this year against the greenback amid trading described as "chaos" and "carnage", the New Zealand dollar rebounded in hectic and volatile trading.
From a spike above US72c early yesterday the kiwi was down below US67.20c around 5am today, but by 10.30am it had recovered to nearly US70c.
The sharemarket, after opening weaker for the sixth consecutive session, recovered to be up 5.6 points to 3963 half an hour after opening.
The New Zealand dollar's 16 per cent plunge from a post-float high of US81.1c on July 24 is expected to hurt consumers in the pocket as imports become more expensive.
BP moved quickly to hike petrol prices by 3c a litre.
Spokeswoman Diana Stretch attributed the rise to the fall in the dollar, combined with a rise in oil prices.
Importers Institute secretary Daniel Silva said consumers should expect price increases on most imported goods.
At the same time, a lower NZ dollar is good news for exporters, piling on the good news for dairy farmers who are already predicted to be in for a record income year.
But Meat and Wool New Zealand economist Rob Davison said sheep farmers would be hoping the dollar's slide would continue into November, when exports usually begin to pick up.
On world markets overnight the big winner was the yen, which had its biggest one-day gain versus the greenback in almost nine years as investors unwound risky trades financed with borrowed yen on fears of a global funding crisis.
Analysts said markets are very concerned there will be a slowdown of the US economy as a result of the current credit crunch.
"There is concern that it will spread to the rest of the world," said one.
Westpac economists warned of the risk of inflation problems as one possible outcome from the market tumult.
"If the NZ dollar was to fall further and stay low despite our commodity prices holding up and no serious hiccups for world growth, then the Reserve Bank would be facing a large inflation problem," they said.
Conservatively, for each 10 per cent the exchange rate fell, consumer price index inflation typically increased about 1 per cent over the following year.
While the exchange rate should be strong if New Zealand commodity prices were good, that was not always the case, chief economist Brendan O'Donovan and markets economist Sharon McCaw said today.
But they also warned another scenario was for the world credit crunch to worsen.
Credit crunches typically came before much uglier "real economy" developments and it was not inconceivable this one could turn "very ugly indeed", Ms McCaw said.
Under that scenario, commodity prices could fall sharply, and the doubling of this country's dairy prices would be seriously under threat, although they did not expect a complete unwinding.
The Westpac economists offered some solace, saying that while this country was heavily reliant on foreign funding, New Zealand was well placed to come through the global ructions better than many others.
The New Zealand dollar was this country's insurance policy.
"If the global economy implodes, our exchange rate will continue to drop like a stone, buffering the impact on our exporters and dispersing the pain by making consumers take some of the hit in the form of more expensive imports."
Yesterday, the Reserve Bank took the unusual step of issuing a statement saying it was monitoring market developments closely. However, while it assured markets it would inject the necessary cash to keep markets liquid, it was not seen as a signal it was about to ease tight monetary policy that has lifted NZ interest rates to the highest in the world.
Indeed, the higher inflation caused by the dollar's crash may keep rates higher for longer. However, if the world economy tanks as a result of the credit crunch, the Reserve Bank will be forced to follow the lead of other central banks to ease rates to revive pressure on the economy even if NZ's inflation rate is above the mandated 1-3 per cent target.
- NZPA
