Rising dollar already hurting commodity exporters

By NZPA

Wednesday 5th June 2002

The suddenly rampant New Zealand dollar is starting to hurt the export sector, continuing to squash commodity returns at a time when world prices are bouncing back.

Dubbed the "Pacific peso" when it plunged to an all time low of US38.95 cents in October 2000, the kiwi dollar was the pride of the Pacific as it soared more than half a cent yesterday to fresh 25-month highs of US49.22 cents.

The kiwi continued climbing after the local market closed, consolidating its gains of more than 4 US cents in a month.

Worryingly for exporters, the New Zealand dollar is currently at three-year highs above 85 Australian cents, from A83c on May 1.

The ANZ Commodity Price Index released today fell 5.2 percent in May, in New Zealand dollar terms, to stand 19.3 percent lower than May 2001.

In comparison, world commodity prices fell 1.7 percent in May, and were 12 percent lower than the same month last year.

ANZ chief economist David Drage warned that although world commodity prices were stabilising, "further currency strength -- which looks likely given its recent momentum -- could send the New Zealand dollar index even lower over the months ahead.

"Further weakness in the New Zealand dollar commodity prices is a major downside risk to export returns and the economic outlook generally."

The trade-weighted index, measuring the kiwi against those of New Zealand's main trade partners, hit a 33-month high of 56.72 and the index is up 12.7 percent for the year.

Finance Minister Michael Cullen, who spooked the market last week by saying he'd be concerned if the currency rose too much because it may hurt export earnings, downplayed the latest rise.

It was largely a result of a correction in the overvaluing of the US dollar, Dr Cullen said yesterday.

"The way I see it, our dollar is rising as a result of the US dollar correcting and coming down after a long period of being overvalued," he told the Bay of Plenty Times.

The speed of the rise of the New Zealand dollar had been surprising but then the speed of the US dollar correction had also surprised, he added.

The local unit was boosted yesterday by another weak night on Wall St where stocks tumbled to an eight-month low.

"That reaffirmed the story of a flat to negative performance in US dollar assets, so fund managers and capital managers around the world looked to diversify out of dollars into other currencies. The kiwi's been a big beneficiary of that," ANZ Bank head of foreign exchange John Body said.

The kiwi has risen 18 percent since the beginning of the year as New Zealand's high interest rates and relatively vibrant economy make it an attractive destination for foreign capital.

ANZ expects the unit to consolidate between US48.30c and US49.20c in the next couple of days, building a base for an eventual move higher towards US50-US53c.

Deutsche Bank has also revised its kiwi forecasts with a 12- month target of US52c.

That bullish 12-month outlook is a worry for exporters who are hedged against the current rally but could be caught short when they come to renew forward exchange contracts.

Mr Body said the export sector was relatively well hedged but that could only insulate companies for so long.

Meanwhile, influential economic thinktank the Institute for Economic Research warned the Reserve Bank that a further tightening of interest rates while the dollar was surging could stall the economy.

"The dollar is amplifying the effects of world commodity prices already being low, that's going to have quite a big effect on our export revenues," NZIER senior economist Doug Steel told NZPA.

"Once that starts flowing through dividends into the income of households, that will start dampening domestic demand in its own right."

The RB said at its last monetary policy statement in May that if the dollar rose more quickly than expected then it might not have to raise rates so far.

"The last thing we need is more domestic demand depressant coming from monetary policy though interest rate rises," Mr Steel said.

The Bank of New Zealand agreed.

"The stronger exchange rate is clearly going to be a drag for New Zealand incomes, growth and, therefore, inflation," BNZ economist Craig Ebert said.

"It is enough to shave as much as 50 basis points off the 90-day interest rate view displayed in the May Monetary Policy Statement."

Mr Body said expectations would have to be recast towards 6.25-6.5 percent cash rates instead of the previous 7 percent call.

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