By BRIAN FALLOW
WELLINGTON - The New Zealand dollar could drop as low as US45c before moving higher later this year, says Bank of New Zealand treasury economist Geoff Mason.
Opinion generally relates the currency's weakness to cyclical factors like the widening current account deficit and interest rate differentials with the United States.
"The general expectation is that these factors are only temporary and improving fundamentals such as stronger GDP growth, better commodity prices and an improving current account deficit should lift the currency higher in the second half of the year," Mr Mason said.
But it is also possible the New Zealand dollar's weakness might reflect structural weaknesses and be a continuation of a longstanding trend decline in the real (inflation-adjusted) exchange rate. That in turn reflected a deteriorating trend in New Zealand's competitiveness.
"Over a long time period New Zealand's equilibrium real exchange rate has been trending downwards, perhaps reflecting our declining terms of trade or the fact that New Zealand's GDP growth has not kept pace with the rest of the world," he said.
It meant that cyclical currency lows got lower and peaks less high.
Reinforcing the trend right now might be a shift in international capital flows from the "old economy" to the new, high-tech one. Commodity producers like New Zealand fall into the old economy camp.
Blips on the radar screen which could trigger a further tumble in the exchange rate included bad trade figures and a possible credit rating downgrade by Standard and Poor's.
Mr Mason expects the January trade figures out on Thursday to show import growth continuing to outstrip the export recovery, a trend that will continue until higher interest rates bite into domestic demand.
The trade deficit is pushing the current account deficit towards 8 per cent of GDP and the last time it was there the dollar fell to US44c.
Although it is a close call the BNZ is not convinced a credit downgrade is inevitable. When Standard and Poor's attached the negative outlook tag to New Zealand's AA+ rating in September 1998 it said a downgrade would occur if global conditions got worse or a new Government took office committed to looser fiscal policies.
Mr Mason said Standard and Poor's recent visit to New Zealand likely gave it the impression that additional spending pressures had largely been contained by the new Government, and that it was committed to maintaining surpluses over the next couple of years.
Kiwi may trend down before lift
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