The value of the NZ dollar has been on the slide. Photo / Getty Images
The value of the NZ dollar has been on the slide. Photo / Getty Images
A New Zealand economist anticipates there could be more pain to come for the New Zealand dollar.
"At the moment, the trend is down," Infometrics chief economist Brad Olsen tells the Front Page podcast.
"We've seen that in recent days, with the dollar continuing to step further down. It does depend on which currencies we're looking at. In relation to the British pound or the Australian dollar, the New Zealand dollar is alright. It's not fantastic, but it's holding at sensible enough levels for the moment."
The same cannot be said when it comes to the US dollar.
Relative to the greenback, the New Zealand dollar has taken a major hit - and there's little sign of this improving in the near future.
Olsen says this comes as the United States continues to raise interest rates, and amid growing concerns about the potential of a recession in the New Zealand economy.
"We're normally seen as a riskier currency, so I don't think there's a huge amount of news anytime soon that would magically turn the dollar around and send us into a better position.
"We've got further to go. We're not down to the US 40c territory that we saw a few decades back, but the current position is a fairway off the 72 US cents that we had seen in the last 12 months."
At the time of writing, the New Zealand dollar is currently sitting at a value of about 56 US cents.
The average New Zealand consumer will notice the immediate impact of that unfavourable exchange rate on the cost of any imported goods or international online shopping. The cost of anything brought from abroad will ultimately go up.
But the real concern about the currency is the broader effect this will have on the economy and how this feeds into other issues, including inflation and rising mortgage rates.
Olsen explains that the value of a currency is determined by supply and demand trends and risk sentiment.
"At the moment, the pound has fallen out of favour because no one wants to buy a whole lot in the UK at the moment. Investors are worried, so they are demanding US dollars... Interest rates in the US have gone up and are set to continue to rise strongly... so, if you are someone who wants to make some good returns, those high-interest rates [become quite appealing]."
Olsen says the US dollar has long been seen as a safe haven in times of crisis, which in turn increases demand for the currency.
This only accentuates the strength of the US dollar, which already makes up 90 per cent of the trillions of dollars of trade deals transacted every single day.
As currencies around the world weaken amid the strength of the dollar, this in turn intertwines our fate with the US economy and its struggle against inflation. We are now waiting in line in the hope that the US manages to tame the inflation dragon first.
"The US Fed is very much dictating the inflation tone and the outlook for where inflation heads. We are going along for the ride, at least when it comes to the exchange rate. The New Zealand Reserve Bank couldn't do anything really to turn the exchange rate around. We're just not a big enough player. We're small fry."
Given that the Fed will continue to raise interest rates in the foreseeable future, this in turn means that demand will remain high for the US currency.
Infometrics principal economist Brad Olsen. Photo / Jess Wong
"That's going to mean that inflation is going to stick around higher and for longer here in New Zealand than it would have otherwise. And it does mean that until the US gets inflation under control and stops raising interest rates, we will be on that roller coaster ride with them."
The continued inflationary effect is something that New Zealanders will experience first-hand, with the cost of living continuing to rise and mortgage interest rates also rising in response to the Reserve Bank's monetary policy.
"Imported cost pressure is at its highest since 1985. Farm costs have been rising at their fastest pace since 1993. And food prices are at their highest in 13 years. These are not good records when you're trying to get inflation under control."
With this inflationary pressure continuing, Olsen anticipates that the Reserve Bank will continue trying to apply the brakes by raising interest rates further.
"I don't think we're done with interest rate rises yet," says Olsen.
"I think it will be into early next year that we will continue to see the Reserve Bank raising interest rates."
