Thursday, July 19, 2007

The elephant in the room

As the New Zealand dollar heads towards 80 US cents, there seems to be a curious myopia in the media. They'll report on the latest wailing and gnashing of teeth from farmers, and the (self-interested - no government wants a housing market crash in the run up an election) threats from Michael Cullen to use The Bomb and order the Reserve Bank to loosen up on the housing market inflation. But they're completely ignoring the other half of the story: that this isn't just about a nasty positive feedback loop between interest and exchange rates, which causes the value of the NZ$ to rise, but also about a steady weakening of the US$ due to President Bush's poor economic policies and attempts to inflate his way out of his war debts.

The Reserve Bank's TWI / exchange rate time series [XLS] tells an interesting story. Here's a graph of how the NZ$ has performed against other currencies, indexed against their value in September 2000 (around the bottom of the last big trough):

Since September 2000, the NZ$ has risen 17% against the Euro, 19% against the AU$, and 30% against the Pound - all of which are within normal fluctuations. But its risen 80% against the US$, and doubled its value against the Yen. Looking at the European Central Bank's collection of time-series data, its clear that this is because both currencies have weakened, rather than being much to do with New Zealand.

This is the elephant in the room: that our dollar is probably going to appreciate in value against the US$ until Americans stop overspending and printing money to pay for their insane war. And farmers had better get used to that fact.