Tackling our high dollar

19:31, Jan 30 2013

HamiltonJet managing director Keith Whiteley this week told an inquiry into the manufacturing sector, set up by Opposition parties but shunned by the Government, that the high kiwi dollar was a major threat to his company's export business. The Reserve Bank's single focus on inflation was out of date, he said; it should consider other measures and targets, including the exchange rate.

Many other exporters (and some economists) agree. But Economic Development Minister Steven Joyce ruled out any intervention to ease the exchange rate. The Government was doing all it could, he said.

But is it? The Wall Street Journal has been examining the track record of quantitative easing, a policy pursued by, among others, central banks in the US, Britain, the European Union, and Japan to make their currencies more competitive for exporters . Each easing, it noted, had prompted predictions of a dollar collapse, a weaker pound or (more recently) a sustained reversal of the yen's long rise. Shorter-term currency declines had followed the announcements, but over the long term those predictions hadn't panned out.

Analysts who study the connection between QE and currency markets have found it isn't as straightforward as many had believed. One obvious reason is that central bank efforts are largely offsetting each other, limiting any big moves. A British currency strategist made another suggestion: printing money (which QE roughly involves) hasn't generated enough inflation to make the policy work. Without inflation, the value of the currency has not been diluted.

Swiss efforts to directly aim at the currency market are regarded as more successful. In that case, the Swiss central bank drew a line through which it wouldn't allow the franc to rise.

Our leaders should take note. First, exchange rate management and the debate around it have become highly sophisticated since New Zealand floated its exchange rate in 1985. Second, beyond our shores quantitative easing is not mocked as "wacky" (Prime Minister John Key's judgment) or as "nuttynomics" (ACT leader John Banks' summation). Third, the inflation monster's arousal - a prospect that alarms the shrill champions of currency non-intervention in this country - has not happened.