Ask the analyst: Riding the dollar
Why is the Kiwi dollar so high against the US dollar? What investment strategy should I be taking to benefit from this position?
Tuesday, March 23rd 2004, 12:21AM
by The Landlord
Reasons for the rise of the New Zealand dollar against the US dollar are varied. First, the US dollar has been allowed to weaken against all currencies in the world over recent periods to help certain sectors of the US economy, in particular US exporters. Second, it should be remembered that the New Zealand dollar behaves like any rationally priced good — if there is an increase in demand for it, the price (or exchange rate) appreciates. The increase in demand for our dollar has been caused by New Zealand interest rates being relatively high compared to other countries, which has attracted foreign investment into Government Bonds. There has also been a strong level of migration into New Zealand over the last few years, further increasing demand for our dollar.
If you take the view that the New Zealand dollar will weaken over time against the US dollar, there are capital gains on the currency movement to be made by investing into US dollar domiciled investments. Once global interest rates rise, New Zealand will not appear as such an attractive proposition for investment of overseas monies. We have a large balance of payments deficit, the economy is very reliant on the agricultural sector and we are indebted to most countries in the OECD.
Options to take advantage of the potential downturn would be based on an individual’s tolerance to risk and timeframe. For instance a conservative investor could place money in US Treasury Bonds and receive a half-yearly interest payment while making a potential capital gain if the New Zealand dollar declines against the greenback over the life of the bond.
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