Bank urged to act on dollar

Richard Baron / Businessday

ONLY WAY IS UP: The Manufacturers and Exporters Association is calling for the Reserve Bank to cut official interest rates tomorrow, to try to get the currency down.

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The New Zealand dollar is way too high for struggling exporters and it is time for the Reserve Bank to intervene to kick it back down, a leading economist says.

BERL economist Ganesh Nana said the kiwi dollar, which traded close to US66c yesterday, had held up much longer than expected when there was no sign of an export-led recovery.

"The exchange rate is just so wrong it is way out of kilter with what the real production side of the economy needs," Mr Nana said, suggesting the dollar should be under US55c.

Trade figures issued yesterday showed exports were about $250 million lower than most economists expected in June. They were hit by falling world prices for dairy products and a rising kiwi dollar.

The higher dollar took another victim yesterday, when WPI International announced plans to close a sawmill in Gisborne with the loss of 65 jobs.

The Wood Processors Association said that highlighted the "devastating impact of our volatile dollar", which had risen 35 per cent since March.

The June trade figures also showed meat exports starting to slow, with lower slaughter volumes, but even outside meat and dairy, exports were "disappointing", say ASB Bank economists.

The Manufacturers and Exporters Association is calling for the Reserve Bank to cut official interest rates tomorrow, to try to get the currency down.

The high dollar threatened any "export-led recovery", the association said.

TD Securities senior strategist Annette Beacher said the Reserve Bank had been uncomfortable with the kiwi at US60c, so was expected to try to "jawbone" the dollar down tomorrow. Exports last month were valued at $3.2 billion, down $395m or 11 per cent from June 2008, according to Statistics New Zealand.

The trade deficit of $471m for June reflected the one-off import of Jetstar aircraft. Imports were weak because of the recession.

Milk powder, butter and cheese exports fell $69m or 11.1 percent in June, largely the result of lower prices. But economists were concerned that a big rise in export volumes was masking the fall in world prices.

They said most export categories in June were weaker than in May, reflecting some weakness in sales volumes, weaker world prices and a 4 per cent rise in the kiwi dollar against a basket of currencies of New Zealand's main trading partners.

Even though June-quarter exports were down more than 5 per cent on a year ago, Deutsche Bank said volumes were probably up about 5 per cent.

Exporters were selling more but getting less for it as world prices fell and the kiwi dollar rose.

Mr Nana said the dollar should be back to between US50c and US55c to send the signal to put more resources into exporting, for an extended period.

The Reserve Bank is expected to keep the official cash rate steady at 2.5 per cent, but Mr Nana said it should act now on the currency.

There was nothing to lose by bringing the currency down, and saying where it should be, he said.

In past recessions, a low kiwi dollar had helped spark an economic recovery. This time, the US dollar remained weak, but international financial markets were ignoring signs that there should be a weak New Zealand dollar.

- © Fairfax NZ News