Bernard Hickey: Rising dollar puts economy on edge

Photo / Martin Sykes

This week our currency rose towards a three-year high of almost US80c.

On the face of it this is extraordinary. Our economy is on its knees. Our second largest city has been badly damaged. Our Government is likely to borrow almost $20 billion this year. Our sovereign credit rating could be downgraded within weeks and our big four banks face their own downgrade.

Yet our currency is back above where it was on February 22 and is near the highest levels it has been since the global financial crisis struck in September 2008.

There are three reasons for this. The first is worth celebrating, the second is also good news and the third is bad news for most and good for some. But all three have a side effect that threatens to unravel the transformation of our economy to an export-led machine.

Firstly, New Zealand is experiencing an historic rise in the price of the commodities it sells. Currency traders and buyers of these exports are snapping up our currency in anticipation that record high prices for butter, meat, wool and logs will translate into demand for NZ dollars.

Secondly, New Zealand is receiving an unprecedented amount of foreign capital inflow in a short time. The Government's budget deficit is blowing out because of the dip in the economy late last year, the earthquakes and the deficit-worsening results of the tax package.

The other reason for heavy capital inflows is an expected surge of $15 billion worth of reinsurance payments from earthquake claims by both EQC and private insurers. Again, the reinsurers will have to buy New Zealand dollars to pay these bills. This influx will help boost the economy next year, but could increase inflation and interest rates.

Thirdly, our banks are back borrowing offshore to lend into the mortgage market.

Mortgage approvals valued at more than $800 million a week over the last four weeks have driven the fastest mortgage growth in 18 months.

All this means exporters not selling meat, wool, dairy and logs are struggling, particularly if their markets are beyond Australia. Luckily for exporters to Australia, our currency is weak against the Aussie dollar, which is seeing its own commodity boom.

If our Government is serious about transforming this economy into an export powerhouse it must act to restrain the currency and the foreign borrowing. The Reserve Bank should intervene to push the kiwi down and could and should introduce controls on banks. The Government also needs to dramatically reduce its deficit and its borrowing.

But is this Government serious about transforming the economy? Voters like a high dollar because it keeps petrol prices down and Christmas presents cheap. Don't expect real leadership anytime soon.