Thursday 21 April 2011

Quit freaking out about the (NZ) dollar

Yes, the New Zealand dollar is high currently relative to the US dollar. This has some folks all in a tizzy. But it's not like we're the only ones appreciating relative to the US. Should we be as worried about the drop in the NZ dollar relative to the Australian dollar? The very mild increase relative to the Euro and the Yen? Should we fear that the ghost of Muldoon has come and ensured a devaluation only relative to the Australian dollar? Ok, the ghost of Muldoon does scare me. He's been tweeting.

Here's the New Zealand dollar relative to other major trading partner currencies. I left out the Yuan since it just follows the US dollar. The link gets you the Kiwi versus the US Dollar; add in the others by hitting the "compare" box.

The New Zealand dollar is high relative to the US dollar and the Pound but has only seen lukewarm appreciation relative to the Canadian dollar and the Yen and mild depreciation against the Australian.

Here's the decline in the US dollar relative to everybody else. They've held steady relative to the Pound, but that's about it.
The US is dropping relative to everybody except the Brits.

You should be asking about my choice of start dates. I truncated the series just before a big data glitch in Yahoo Finance where an error in the recorded value of the New Zealand dollar wrecks the whole graph.

Journalist Alex Tarrant pestered Labour leader Phil Goff about the exchange rate, reminding him that a high exchange rate (which Goff opposes) mitigates relatively high current inflation rates (which Goff also opposes). Goff's answer? That economics is a dismal science so making one thing better often makes another thing worse, but that current high exchange rates induce unemployment and that inflation has worse effects when unemployment is high.

Goff didn't say it, but I suppose the policy implication is changing the policy targets agreement to tolerate higher inflation outcomes (or otherwise messing around with the Reserve Bank's mandate), resulting in a lower dollar, potentially higher employment in the short term, and rather higher inflation. But if his real policy preference is higher inflation outcomes with (he hopes) lower unemployment, it would be hard to discern that from his constant sniping at National for the increase in the price level that came from the GST increase - an increase that was fully compensated by income tax cuts. Labour's apparent proposed hike in the inflation rate would be compensated by hopes that the long run aggregate supply curve isn't vertical.

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