By SIMON LOUISSON of NZPA
The New Zealand dollar was the world's worst performing freely traded currency in 2000 - and it had some pretty stiff competition from the aussie dollar and the euro among others.
But late in the year it finally refound its wings, appearing to decisively end a downtrend in which it dropped from 72USc in late 1996 to an all-time low of under 39USc on October 18.
At one stage the kiwi, dubbed the peso of the South Pacific, ranked worse than basket case currencies like the Russian rouble and on a par with the Zimbabwean dollar and Ecuadorian sucre.
Such was the angst over the kiwi's weakness that talk of union with a larger unit - the aussie or greenback - got serious traction.
Prime Minister Helen Clark in September said a common currency with Australia was "inevitable" at some point. John Howard, her Australian counterpart, made it clear "union" meant New Zealand adopting the aussie dollar and he would not push the idea.
As the kiwi recovered strength union talk died down.
The apparent end of the kiwi's demise has come as a relief to most of its namesakes - from Reserve Bank Governor Don Brash to Joe Blow worried about his travel expenses.
However, the kiwi was still down 16 per cent against the US dollar for the calendar year.
The turning point came in late November, precipitated by procrastination over the indecisive US election result and fears the economy there would land hard.
The kiwi's demise was partly self-inflicted and partly the result of a US dollar on steroids, reflecting the phenomenal and unprecedented period of growth in the US.
During the year, the Australian dollar fell 23 per cent against the US dollar to a nadir of 50.73USc and the euro fell 18 per cent, proving the kiwi's problems were not all related to the local economy.
But the New Zealand dollar fell against both those currencies and its trade-weighted index - measuring the kiwi against the currencies of New Zealand's five main trading partners - fell to a historic low of 46.33, some 17 per cent below the year's starting point.
So, why did the kiwi fare so badly?
The first reason is the strength of the US economy. Investment flows were all heading towards the United States. The kiwi, Australian dollar and euro were all affected by so-called momentum traders, who move their money with the flow.
What limited offshore investment there was in New Zealand equities, such as Telecom, or the bond market was significantly unwound as investors hunted gains in America.
Secondly, 2000 was the year the current account deficit - the difference between what New Zealand earns and spends in the world - finally caught up with us.
The deficit peaked at $7.5 billion, 7.2 per cent of GDP, and by far the highest in the OECD - and foreign investors finally decided they didn't want to take further risks.
There were other factors.
The chickens came home to roost on some $20 billion of NZ dollar-denominated bonds, known as eurokiwis, flogged off from 1995-1999 and starting to be redeemed at great loss to the hapless investors.
Then there was the economy.
Dr Brash lifted interest rates five times from mid-November 1999 to May 2000 and managed to almost tip the economy into recession with help from new Government policies such as renationalising ACC.
Growth had steamed away in the December and March quarters and Dr Brash was attempting to pre-emptively strike against inflation, fuelled by rising oil prices. The result? GDP fell 0.9 per cent in the June quarter and the dollar fell with it. Foreign exchange analysts argued that instead of chasing currencies with high interest rates, as had been the case in the past, the "hot money" was following growth stories - which New Zealand definitely was not.
So Dr Brash's series of interest rate rises actually resulted in the kiwi weakening further.
The sharemarket was no friend to the kiwi either. Its stagnant performance over the past six years did nothing to attract fresh investors and its one shining light over that time, Telecom, had a dismal performance.
Finally, business confidence slumped, partly because of the kiwi's fall and interest rate rises, but also as the new Government introduced policies deemed unfriendly to business and as big business campaigned to unsettle the Government.
So why did the kiwi's fortunes turn late in November?
Firstly, the US dollar sagged as uncertainty caused by the election combined with a growing feeling that the US economy is set for a hard landing.
But sentiment finally turned in favour of the kiwi as people argued it was oversold.
Even Dr Brash said the kiwi had fallen below its long-term "equilibrium value." He estimated the TWI should be around 57-58 rather than 46-47.
Goldman Sachs' chief currency economist, Jim O'Neill, cited the go-ahead for Shell-Apache's $4.1 billion purchase of Fletcher Energy as the catalyst. It indicated that foreign investors were still welcome in New Zealand and international firms continued to see business opportunities here, Mr O'Neill said.
He has recommended a "long New Zealand dollar position" as one of his five investment picks for 2001.
Nearly all the local banks are picking a substantial rebound.
Simon Tyler, head of treasury at National Bank, is in no doubt the kiwi's fortunes have turned, although he predicts a more subdued climb than Goldman Sachs.
"The economy is starting to pick up. Exporters in the rural sector are doing very well at the moment. There are still a few question marks in the economy, but generally there's strength in a lot of sectors and both the kiwi and Australian dollars are below fair value."
Graeme Edie, Westpac Institutional Bank dealing room head in Wellington, agreed the kiwi had broken its downward trend.
"From a technical point of view, it is looking good. From an economic point of view, it is looking good.
"All the stars are starting to align but it is not out of the woods yet, we can go back and test a little bit lower first."
<i>Currency:</i> Kiwi finds its wings after long grounding
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