Dollar's next big move down, says BNZ

By BRIAN FALLOW

The kiwi dollar's next big move will be down, but it may take some time for that to happen, say Bank of New Zealand economists.

In their latest Economic Monitor, they recommend that exporters consider reducing their hedging and that importers think seriously about increasing theirs.

Over the past month the New Zealand dollar has dropped about 8 per cent against the United States dollar.

"We would attribute about three-quarters of this shift to strength in the US dollar, which over the same period has risen 2.4 per cent against the yen and 4.7 per cent against the euro," the BNZ economists say.

Although those moves are smaller than the kiwi's, less liquid currencies tend to move more when a turnaround comes.

In that regard, the Australia dollar's 7 per cent fall against the greenback is instructive, the BNZ economists say.

They note a big variety of opinion on whether the US dollar has finally bottomed out.

They say that those who focus on structural factors such as the United States' fiscal and external deficits doubt if the US dollar is now ready for a sustained recovery.

"With no end in sight to the United States' twin deficit problems, the demands on foreign funds and the risks associated with that demand would tend to suggest the US dollar should fall further."

But those who focus on cyclical factors point to the likelihood that the US will grow more strongly than other major economies, which is normally a reason to buy a currency.

Whether structural or cyclical considerations will dominate is a fine judgment call.

Until that becomes clearer, the kiwi dollar is likely to move little overall in either direction but to have an upward bias, they believe.

The direction of the US currency may be the largest influence on the exchange rate but it is not the only one. Some of the recent fall can be attributed to the Reserve Bank's decision to leave interest rates on hold and some to talk of Reserve Bank intervention.

The BNZ economists believe the bank will be in the market soon, trading New Zealand dollars for foreign currency.

The Reserve Bank has a longstanding policy of maintaining foreign currency reserves to use in the event of a disorderly market, but the level of reserves was set in 1988.

It would have wanted to increase those reserves even if it had not adopted the new policy of being willing to intervene to shave the tops and bottoms off the exchange rate cycle.

That new policy will also require reserves, and the best time to acquire them is when foreign currencies are cheap in New Zealand dollar terms.


"In our opinion likelihood of the bank actually intervening in this cycle is small," the economists say.