When the dollar was floated, 20 years ago yesterday, many held their breaths. They included some in Parliament who, in later governments, would become staunch adherents of policies attuned to a floating currency. But on March 4, 1985, when the Government ceased to set the dollar's exchange value and left it to the trading of finance dealers, there were fears it would drop through the floor.
It did not. For some time rates stayed much where they had been after the 20 per cent devaluation that followed the 1984 election, which suggested that governments can get it right - if they want to. Politically, it was always tempting not to put it right.
Exchange fluctuations are unsettling for business, particularly exporters and those who compete with imports, until firms learn to hedge against it. It is easier to avoid unsettling people with fluctuating rates and accept the gradual strains that a fixed rate places on the economy.
Left alone, a currency's exchange value will broadly reflect the trading fortunes of its economy, although there is always the possibility of a speculative attack by dealers who can marshall funds that dwarf a small country's trade. That was a spectre often raised in argument against the float, but the experience of 20 years suggests currency speculators have better things to do. Far from falling immediately after the float, the "kiwi", as foreign dealers dubbed it, rose close to parity with the Australian dollar the following year. It has been at even higher levels in recent weeks.
The float, though, has had problems along the way. For much of the 1990s the dollar was said to be overvalued as a consequence of the Reserve Bank's determination to keep inflation under control. For some of that time the reason had less to do with the bank's intentions than an unshakeable suspicion in the finance markets that the bank would not allow the dollar to fall below a certain, unstated, level. It took the publication of an index charting the combined effects of interest rate and exchange rate changes to convince the market otherwise, and then the index became problematic.
But one problem may be that foreign exchange markets respond to a country's public policy as much, if not more, than the performance of its private enterprise. That might explain why New Zealand has had a high dollar through periods of poor trading performance and despite its inability to appreciably reduce its dependence on raw commodity exports. If sound public finances and strong anti-inflation policies are powerful attractions to foreign capital the exchange rate will be high and dollar returns on commodity trade will suffer.
Investors' confidence, or lack of it, in public policy might have also explained the dollar's fall near the end of the 1990s when power was passing to a party that disparaged much of the economic reform. The currency's fall, combined with strong commodity prices, helped to spur the economy to today's heights and now the dollar has followed suit.
It is too high for a Finance Minister's comfort but he, like his predecessors of 20 years, shows no inclination to intervene. And there is no call from the business community to do so. The country has learned to live with a currency readily exchangeable at true value, and we are stronger for it.
<EM>Editorial:</EM> 20 years on and dollar stays afloat
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