Is "parity" worth a party? As our dollar approached equal value with Australia's on Monday, it was not hard to find party poopers. The cross rate was mainly a reflection of Australia's troubles. Yesterday, its central bank defied expectations that it would lower interest rates to boost its flagging economy but may need to do so next month. The expectation is making New Zealand rates more attractive, increasing demand for our dollar.
Parity, or something close to it, is good news for New Zealanders travelling across the Tasman or importing Australian products, not so good for those exporting to that market or relying on tourism from Australia. Currency is always a double-sided coin. An exchange rate is never at the "right" level. Politicians and business commentators can waste a great deal of breath postulating where the dollar "should" be.
From the moment in 1985 that the kiwi was cast afloat on currency markets, its rate has been set by foreign investors' confidence in the economy and its management. The dollar approached parity surprisingly soon after the float without quite reaching the levels of Monday. Its strength was a revelation to everyone whose education has included a smattering of economics. New Zealand had a chronic deficit in its external balance of payments, and still does. A floating exchange rate was expected to fall until the country's earnings matched its outgoings, but the economic reforms under way at that time produced a different response.
Currency markets were less interested in the balance of payments than control of inflation and public debt. Government turned out to be more important than any range of exports to investors, brokers and credit rating agencies.
Very high interest rates were needed in the early years to bring down inflation and the Reserve Bank has kept a tight rein with interest rates higher than those of most central banks in the decades since. Parity party poopers will attribute the exchange rate entirely to those interest rates on kiwi dollar bonds but they overlook the fact that interest rates alone would not sustain the currency's value if the investors saw loose government spending, rising debt and political instability.
