On the other hand, exporters and local tourism should benefit.
Overall, imports exceed exports, so there is a small net loss when valued in New Zealand dollars. More importantly, it is not a good thing if the rest of the world has less confidence in New Zealand’s economic future than before.
We could do little if the cause was a domestic catastrophe, such as a devastating earthquake, or a global one, such as an escalating military conflict or a sovereign debt crisis. But neither explains the slide.
Two facts narrow the possible reasons for the fall and a third shows why the fall matters if it persists.
First, the cause is specific to perceptions of New Zealand. The Reserve Bank of New Zealand publishes daily exchange rates between the New Zealand dollar and 17 other currencies. Remarkably, our dollar has fallen markedly against them all, even the declining British pound.
Second is the marked decline against the Australian dollar. It is our closest neighbour and has a common institutional heritage. Our currencies usually move broadly together against the US dollar. For the past decade, one New Zealand dollar has bought A90c on average. This week, it only buys A81c, its lowest value since early 2013.
The world is telling us something specific to us. But what is it?
The concerning third point is that the decline is news to the Reserve Bank and the Treasury. The bank’s central projection for its September 2 monetary policy statement was that the New Zealand dollar would average 66.7 against its basket of currencies in the September quarter and strengthen marginally to average 66.9 thereafter. The Treasury’s forecasts released on Tuesday this week put the average level for the year ended June 2027 even higher, at 67.7.
The September 28 value of 64.3 is well below those averages. If the exchange rate quickly regains lost ground, that need not matter. But if it does not, the inflation risks will rise with implications for interest rates.
One possible factor is the Monetary Policy Committee’s September 2 decision to raise the Official Cash Rate by 25 points. Currency markets may have viewed the accompanying signal as too soft. By September 4, the New Zealand dollar was 1% below its September 1 value against the Reserve Bank’s basket of currencies.
One statistical indicator worth watching to see if the world is losing faith in a country’s economic management is the combination of a falling exchange rate and rising interest yields for that country in the world’s government bond markets.
Yields on New Zealand bonds have been rising, but not relative to the rises in many other countries. So that warning light is showing orange at most.
No one should feel complacent about that, welcome though it is. New Zealand’s public debt and rising interest rates are an issue.
This calendar year, two of the world’s major rating agencies put New Zealand on a negative outlook for its public debt levels and a third criticised the Government’s Budget for not being more convincing about the path to a surplus. Perhaps the drop in the New Zealand dollar’s exchange rate is anticipating a looming credit rating downgrade.
In Budget 2024, the Government chose to cut government spending growth rather than overall spending, continue to borrow heavily and hope for economic growth to lift tax revenue.
The choice was challenging. A more decisive strategy might have had more short-term pain but it would have built greater confidence and credibility.
The next Government faces a similar credibility challenge, but this time, financial markets and rating agencies are giving us all a clear message that the world does not owe New Zealanders a guaranteed income, minimum or otherwise.
There is no clear reason for the sudden and significant fall in the value of our dollar. But it is disquieting. If it persists, many will feel poorer because of higher prices and the Reserve Bank might have to increase interest rates further.
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