Kiwi dollar the most unstable - study

The following news report is covered by the two key persons in this study are my professor and tutor. I think it's time for them to start blogging.

Most exporters know that grappling with the volatility of the floating New Zealand dollar is a nightmare for their business and a study out today confirmed that.

The kiwi dollar and the Japanese yen are joint winners of the world's "wobbliest currency award", according to researchers at Victoria University.

Professor Roger Bowden and PhD student Jennifer Zhu investigated the variation of 13 major floating currencies since 1986, measuring all exchange rates off a common reference base.

Both the kiwi and the yen had major variations in a cycle of about seven years. The New Zealand dollar nearly doubled in value from a low of under US39c in late 2000 to nearly US74c last year.

By contrast, the Australian dollar was the world's third most stable currency in all bands, though the United States dollar was among the less stable.

The Singapore dollar was the most stable, followed by the Norwegian Crown.

Prof Bowden said the analysis showed the difficulties New Zealand business had faced and the conclusion re-raised the issue of whether New Zealand should pursue monetary union with Australia.

"It shows what Kiwi exporters and importers have had to put up with over the years compared to their competitors across the Tasman.

"We were surprised at the stability of the aussie dollar and it reinforces our findings from another study that Australian shares have been an excellent stocking filler for NZ investors, in terms of the stability they provide to the portfolio."

The new findings come at a time when monetary policy in New Zealand is under the microscope with Treasury, the Reserve Bank and the Government looking for new "tools" that could help improve monetary policy control.

Prof Bowden said there was a fear that the exchange rate had become the major defacto policy tool with more direct instruments, such as interest rates, less effective.

He said the study raised afresh the issue of whether a common currency with Australia would help.

"One thing you can be sure of though, is the Reserve Bank will not be in favour of monetary union with Australia because they will be out of business."

He said under inflation targeting guidelines, the Reserve Bank often raised interest rates at the wrong time and the currency rose inappropriately as a consequence.

"It's that effect on exports that gives them a lot of concern.

"Defacto, the real monetary controlling instrument is not the interest rate as such, it's the exchange rate."

"There is little doubt that inflation rate targeting has a role in exacerbating and making the exchange rate cycle worse."

He did not believe the instability would go away any time soon.

Prof Bowden said people had to understand that these "partly predictable" cycles were a reality and firms exposed to medium term currency swings should put in place active programmes of hedging and risk management.


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