Fran O'Sullivan: Time to man-up on soaring NZ dollar

What a pity that the New Zealand general election is still three months away.

Otherwise John Key and Phil Goff could put aside their absurd pantomime over the soaring New Zealand dollar and try to forge a unique bipartisan consensus to avert another recession.

The Prime Minister is in the position to invite Goff and his finance spokesman David Cunliffe to join him, Finance Minister Bill English and top Treasury and Reserve Bank officials for bipartisan talks now on this looming threat to our economic recovery.

The kind of conversation that Key himself requested in a written letter to former Labour Finance Minister Michael Cullen when an infusion of hot money was endangering our economy several years ago.

Key is not likely to do this before the November 26 election. But surely, whoever of these two political leaders emerges as Prime Minster will man-up to the obvious need for bipartisan policies that will lessen the domestic economic impact resulting from extreme currency speculation and the exposure of our commodity exports to the US dollar.

From New Zealand's vantage point at the bottom of the South Pacific, it is tempting to pour unrelenting scorn on the feral partisanship that has taken grip of Washington (as I did last week) and ignore the stupidity that occurs in our own backyard.

It is instructive that while the Labour leader is now banging on about how our exporters are hurting as a result of the high New Zealand dollar (particularly against the US dollar - but also some other prime currencies), Key is playing the old Pontius Pilate line, saying there is nothing the central bank can do to lower the dollar.

He was reported yesterday as saying world financial markets see New Zealand as a "better bet" than the US because of their debt, high unemployment and sluggish growth.

But the Prime Minister's memory is faulty.

Four years ago, Key was singing a different tune when he bailed me up at an Australasian power-brokers conference in Sydney.

Back then Key - at the time National leader - argued the New Zealand economy couldn't sustain exchange rates at US74c. He predicted this would result in substantial job losses and closures - as indeed it did.

But with the kiwi trading at around the US87.5c mark yesterday as the House of Representatives passed its surreal legislation to raise the debt ceiling by US$2.1 trillion - it's pertinent to ask Key why he believes New Zealand exporters can now tolerate a cross rate of US87.5c when he said they couldn't manage at US74c four years ago.

In April 2007, Key said he wanted formal talks with the Government on how to stem the vast flows of Asian hot money into New Zealand that were pumping the exchange rate to crippling levels.

He acknowledged this would be difficult - but felt if nothing was done to tackle the conditions that were attracting Asian cash here to take advantage of what was as that time the highest interest rates in the Western world, the consequences would be severe.

"We're very happy to work with the Government on this - it's totally a capital-markets and hot-money issue," he told me then.

Today's conditions are very different.

It's not Asian hot money that is pumping our currency up - though that remains a prospect if the Reserve Bank embarks on another aggressive series of rates hikes. The real issue is the marked depreciation of the US dollar. This is the upshot of the Federal Reserve's decision to embark on its nakedly self-interested quantitative easing policy.

Add this to government debt levels that would challenge the imagination of a Lewis Carroll and a bizarre alternative reality has emerged which has resulted in English saying New Zealand is a "safe haven".

English maintained yesterday that New Zealand is relatively better placed than many other countries to manage in what will remain a pretty uncertain global environment.

"We're getting on top of debt by keeping it below 30 per cent of GDP and we will be back in surplus by 2014-15." It is of course critical to New Zealand's future that international debt investors do not lose confidence in this country's ability to pay its way.

But New Zealand's exporters do not need to see the currency get so out of whack with the underlying reality that this country is no longer a "safe haven" for them to operate from.

Goff's prescription is for wider powers for the Reserve Bank, and taxes on hot money (the kiwi is the seventh-highest traded currency in the world).

Our currency is obviously gamed by speculators.

Key did just that himself in the 1980s when he headed up forex dealing rooms. Even investors such as Warren Buffett's Berkshire Hathaway have boasted in annual reports of the multi-millions of dollars made playing our small nation's currency.

So only mugs would refuse to investigate options.

There would inevitably be difficulties changing the central bank's over-riding policies.

But New Zealand could also usefully read the signals from Beijing and elsewhere. Time surely then to support Beijing's call for the US dollar to lose its reserve currency status.

If our commodity exports - including the international milk powder trade - were no longer denominated in US dollars, our position as a nation would arguably be more secure.

In Key's case, it is time to stop thinking like a currency mover and more like an export mover.