Monday, 11 June 2007

Reserve Bank takes aim against NZ Dollar

New Zealand Reserve Bank Governor, Alan Bollard, has taken the highly unusual step of intervening in the foreign exchange market, selling off $1.5 billion NZ dollars in a bid to cap the value of the NZ dollar.

Media reports say it's the first time the RBNZ has intervened in this way since the New Zealand currency was floated in 1985. The kiwi dollar is now track for its biggest one day loss since March 2006.

Bollard's move follows the kiwi dollar hitting a post-float record high of US76.2 cents. Last week, he surprised financial markets by raising New Zealand's already high Official Cash Rate to 8 per cent, the third rise in four months.

The rises are an attempt by the Reserve Bank to curb inflation, but have had the effect of encouraging more foreign investors to move money here, to take advantage of the high interest rates. That in turn forces up the exchange rate, as investors buy more kiwi dollars.

There is an argument that the New Zealand dollar should be left as is, leaving the economy open to an inflationary period, which should include strong wage and salary driven inflation.

That could drive up the relative earnings of New Zealanders, who often find the Pacific Peso doesn't go very far overseas. (The NZ$ fell as low as US39.22 cents in November 2000). In the early 80s, the kiwi dollar was worth more than US $1, and was also much stronger against the British Pound.
Financial analysts point out the Reserve Bank intervened on a quiet day (the Australian markets were closed for a holiday)... It remains to be seen how willing it may be to repeat the action in a stronger market, when there is more money in play.

Dr Bollard has reserves of just $7 billion to play with. That's a small amount against what overseas currency speculators have in their arsenal. Some analysts wonder whether speculators could call the Reserve Bank's bluff, and try to force the New Zealand dollar even higher than US76 cents.

American currency speculator George Soros famously "broke the Bank of England" on Black Wednesday (16 September 1992). The UK Conservative Government was forced to withdraw the Pound from the European Exchange Rate Mechanism, when it ran out of funds. (The UK Treasure estimated the cost of 'Black Wednesday' at £3.4 billion.)

* Stuff: RBNZ confirms intervention in NZ dollar

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