NZ Dollar - Too Far, Too Fast?
Since June 1997 the performance of the New Zealand dollar has been anything but impressive (unless you were short!). This is demonstrated by a quick look at the statistics - down 25 per cent against the United States dollar, down 7.1 per cent against the Australian dollar and Japanese yen and down 14 per cent on a trade weighted basis. At that time, while most commentators agreed that the dollar was overvalued, few would have believed it possible to see our dollar fall below 50 US cents less than 12 months later. Indeed it is not the fall that has surprised but the speed and depth of the fall.
As is usual in financial markets, it was a shock (unforeseen occurrence) that provided us with that surprise in the form of the Asian economic crisis sparked by the devaluations of the Asian currencies. The timing of this external shock was a little nasty for the New Zealand dollar which had just begun playing its part in easing monetary conditions to spur the slowing New Zealand economy. In the end the external shock dwarfed domestic considerations as the New Zealand dollar was "lumped in" with the rest of Asia and speculators sold any Asian currency that showed signs of liquidity.
Ironically during the last year New Zealand's high interest rates, which were heralded as the great support for the dollar during 1995-96 and the key reason for its strength, failed to provide any support at all.
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