Editorial: Curious act talks the kiwi down

Until not so long ago finance ministers and Reserve Bank governors were circumspect about making any comment that might influence the dollar's exchange rates. Nowadays, their speeches are sprinkled with attempts to talk the dollar down and, it turns out, they have had their officials tell Japanese investors directly that the dollar is a high risk.

Their message seems to have registered. Word in the market last week suggested a $600 million issue of New Zealand dollar-denominated "uridashi" bonds had been cancelled as a result of the efforts of NZ officials.

It is extraordinary that a government should go to such lengths to undermine its own currency, yet understandable too. The high interest rates that the Reserve Bank needs to maintain to stop an outbreak of inflation are among the highest in the world.

Small investors everywhere, but particularly in Japan, are attracted to those interest rates and their demand for the kiwi keeps the dollar high, hurting our exporters.

The money attracted by our interest rates goes mostly into mortgaged property here, which helps to keep land values high and that in turn encourages households to spend at a level that causes the bank to worry about inflation. In other words, the interest rates than can prevent incipient inflation are now also causing it.

Almost everyone except the Government's political rivals applauds the attempt to offset the appeal of our interest rates by undermining the exchange rate, though not all are confident it will succeed. The fact is, floating exchange rates long ago lost much connection to economic performance measures such as trade balances and external accounts. The dollar is high despite a deep current account deficit because foreign investors have confidence in this country.

Their confidence might be poorly informed; there are signs they associate us too closely with Australia, but it is just as likely that the strength of both currencies is based on confidence in their economic management.

If that is so, the meetings Treasury and Reserve Bank officials had with Japanese investors could merely reinforce that confidence, and keep the dollar high.

The fact that New Zealand officials would go to such trouble tells the investors this Government has no intention of intervening in the foreign exchange with the simpler tools still favoured in East Asia. Governments there largely peg their currencies to the United States dollar, despite the fact that fixed exchange rates caused their banking crisis nine years ago.

The National Party's finance spokesman, John Key, said the Reserve Bank was "whistling in the wind if they think they are going to convince Japanese retail investors not to continue to buy uridashi issues". If the bank wanted to reduce the appetite for these bonds it needed to cut interest rates, he said.

Mr Key could have been finance minister by now if National had won an extra 2 per cent of the vote in September. Would he be saying the same thing? Or would he be doing his bit to help contain inflation, a task that would be a little harder with National's tax cuts in prospect?

When inflation for the December quarter was reported last week, it was down on September and lower than forecasts by independent economists and the bank. The exchange rate eased a little as well with the likelihood that no further interest rate increases will be needed.

It is too soon to drop the rates as Mr Key would like, but Japanese investors have probably seen our rates pass their peak. It is almost certainly downhill for the dollar from here and relief at last for the exporters who ultimately earn our living.